
d^ 



MICHIGAN TEXTS IN ECONOMICS 



READINGS IN 

CURRENT ECONOMIC 

PROBLEMS 



^?7 ALTON H. HAMILTON 



THE UNIVERSITY OF MICHIGAN 

ANN ARBOR 

1914 



<N^ 






COPYRIGHT, 1914, 
By Wai^ton H. Hamii,ton 



THE ANN ARBOR PRESS 

PRINTERS TO THE UNIVERSITY OF MICHIGAN 

ANN A RBOR 



fEB 20 1914 

)CI,A369090 




PREFACE. 

This book of readings is intended only for the use of students 
in elementary economics in the University of Michigan. It is 
designed particularly to meet the needs of the classes in Political 
Economy 2, students who have already had a stiff, course in economic 
theory, and who need a general introduction to current economic 
problems, giving them some conception of the extent of the field, 
the interrelation of the problems, and a clear perspective of the 
subject as a whole, as a preparation for courses in specific subjects, 
which most of them will take later. 

it is a theory of mine that in general, but particularly in the field 
of the social sciences, every university should use its own text- 
books. Purely local conditions, the general spirit and tone of the 
institution, the traditions of the department, the personnel and 
intellectual interests of the instructorial force, the previous courses 
which the students have had, particularly in the department, the 
courses which they are expected to go into, — all of these, and a 
number of other things, many of them too intangible to be expressed 
in set terms, must influence the purpose, the methods, and the 
content of every course of instruction. To some extent these things 
find their expression through the work of the teacher in the class 
room, but sometimes they are of such importance as to determine 
the whole character of the course. This is particularly the situation 
with a course that follows a definite elementary course, and prepares 
the way for equally definite advanced courses. In view of the transi- 
tional function of the course, the use of a general text, even were 
one available covering the realm of Current Economic Problems, 
written without regard to the exigencies of its local use, would prove 
only h^lf -satis factory. With it as a basis, a course could be made to 
serve local needs only by a rather extensive use of the lecture. But 
this method of instruction has almost universally proved to be 
uneconomical, deadening and too formal and stiff to meet the 
needs of students who are alike human and individual. The only 
alternative is a text prepared to meet local conditions. The latter, 
if published by the educational institution and without pecuniary 
profit as an object, permits the frequent issue of small editions, and 
allows the book little by little to adapt itself to existing pedagogical 
needs. 



vi PREP AC B 

It is not my idea that the basis of a course which deals primarily 
with "current" economic problems should be a book of readings. 
It seems to me that a text, presenting a unified perspective of the 
field, supplemented by a collection of readings, and the rather exten- 
siye use of current periodicals, would much better serve the purpose. 
Since, however, no suitable text is available, and the demands on my 
time have for the present precluded the writing of such a text, a 
book of readings is offered as the most suitable substitute. But for 
that reason the present volume is made to serve two purposes only 
one of which it should properly be called upon to fulfil. To some 
extent it contains readings which constitute the back-ground of the 
course. To some extent it is a collection of readings illustrative of 
views antagonistic to those of the instructors in the course and of 
selections which throw interesting side-lights on some of the main 
questions discussed. The latter function is the one which the book 
should be made to perform. And it is hoped that later circumstances 
will be such that it can be confined to its proper function. 

Accordingly there is no pretense of presenting a unified or com- 
plete treatment of current economic problems in this volume. The 
unity of the course for which this book is intended is to be found 
in the simultaneous use of a number of complementary means of 
instruction. In addition to this book the course makes use of a book 
of problems and exercises, a limited number of lectures, and a course 
of supplementary reading. The unity is to be found in these com- 
plementary instruments, each of which is valuable only in connection 
with the others. 

Yet there is more unity of purpose in the book than the list of 
readings seems to indicate. The selections come from very mis- 
cellaneous sources. They are written by men possessed of the widest 
variety of economic, political, and sociological opinions. Not only 
in theory, but in interpretation of facts, they are often contra- 
dictory. They represent the most orthodox and the most heterodox 
attitudes on public questions. A large number of readings are entirely 
out of harmony with the views of the instructors on the subjects 
with which they deal. Many of them are regarded by them as 
almost wholly fallacious. But for these very reasons their efifect may 
be all the more a unified one. It is hoped that they will help the 
student to approach current economic problems without personal or 
class bias ; that he will come to see that his opinions are not neces- 
sarily the expression of economic verity ; that he will acquire a will- 
ingness to hold his judgment on public questions in abeyance. Vital 
and valid arguments in favor of a proposition antithetical to that in 
which the student believes should do much to prevent haste in the 



PREFACE vii 

formation of his final judgment. Antagonistic and even erroneous 
arguments have their pedagogical value. Stimulation is by provoca- 
tion as well as by suggestion, and it is hoped that more than one of 
the readings which follow will provoke the student into a more 
careful formulation of his opinions and a clearer statement of his 
reasons for possessing them. 

The above implies that it is not the purpose of the courses in 
which his book is used to "solve" public economic problems. In a 
single course, coveringthe number of problems treated here, it is quite 
impossible for the student to acquire the thorough acquaintance with 
the subject which should precede the formation of final opinions. 
The function of the book, therefore, is introductory: it is to open 
questions, not to close them. Further, it is extremely doubtful 
whether the kind of questions with which this book deals can be 
settled dogmatically. On the validity of an economic principle or 
a definite economic law, as, for instance, the law of diminishing 
returns, the economist can and must be dogmatic. On a question of 
public policy, involving, not one, but many economic considerations, 
as well as aspects which transcend the economic and get into the 
realm of the political, the social, and the religious, the economist 
cannot be dogmatic. There is no common denominator in terms of 
which conflicting economic considerations can be balanced against 
each other, and the comparison of political, social, and economic 
considerations against one another transcends the ability of any 
economist to find a common unit of measurement in terms of which 
conflicting interests varying so widely in nature can be adequately 
gauged. Therefore, since almost every question of public policy 
involves these conflicting considerations, it is doubtful whether any 
course, no matter how thorough, can present the kind of unity which 
resides in definite proposals for the elimination of the evils that 
inhere in economic institutions. This lack of dogmatism, however, 
must not be allowed to lead to the inculcation of a catholic attitude 
toward economic fallacy or to discourage a careful and painstaking 
analysis of the questions treated. 

Nevertheless there is substantial unity running through the 
present volume. The readings have been selected with the end in 
view of showing the intimate connection between seemingly distinct 
economicdnstitutions and distinct economic problems. They should 
show that none of these problems can be solved in isolation. Further 
the view-point of the book is frankly historical. Not only is indus- 
trial society and its institutions the result of a process of develop- 
ment, but the principal problems of today can be understood rightly 
only when it is clearly seen that they have emerged in the course of 



viii PRBFACE 

this process of development. Again, as industrial society develops 
and its institutions change, each of these problems is assuming new 
forms. For instance, the tariff question in 1913, in its influences and 
effects, was quite a different question from the tariff question of 
1897. Consequently the readings convey the impression that the 
problems of today are not to be quickly solved ; and that their gradual 
solution, or obsolescence, will introduce new problems quite as diffi- 
cult and complex. And they should reveal the view-point underlying 
the course, that the problems are not to be solved in isolation, exclus- 
ively by legislation or some other kind of mechanical tinkering, but 
only by consciously directing towards a given end the gradual 
development of industrial society. 

The character of the selections used deserves a word of explana- 
tion. In general they aim to emphasize the theoretical aspects of the 
subjects treated and to present the psychological attitudes of various 
classes in industrial society, rather than present summaries of the 
so-called "facts." This is due to my belief that the fundamental dif- 
ferences between the proposals of those whose views are antithetical, 
as well as the terms in which the various problems are conceived by 
different classes, are due. not to any failure to get at the facts or 
I any misunderstanding of them, but to radically different view-points 
Jfon the part of the various classes. Further the gathering of facts is 
necessarily based upon underlying theory, and the interpretation of 
facts once gathered is wholly a matter of theory. Often it is much 
more important to determine the theory underlying an investigation 
into facts than to gather the facts themselves. To cite a single 
example, what valuation is made the basis for the determination of 
the rates which railroads will be allowed to charge in the future is 
almost entirely a question of the theory of value which will be made 
the basis of the evaluation. Further, even though the facts may be 
rapidly changing, many questions of economic importance remain 
fundamentally the same. So, while facts have by no means been 
excluded, they have not been used to such an extent as to cause the 
book to neglect real fundamentals. 

It will be noticed that the volume is composed of a very large 
number of short selections rather than a very few long ones. What- 
ever may be said about the value of having a student go through 
long readings and pick the heart of the problem out of matter 
extended and rather diffusive, it seems to me that this type of a 
book of readings does not meet the needs of an elementary course. 
With the longer readings it is entirely out of the question to secure 
in the space available reading sufficient either in scope or in intensity 
for a real university course. Long readings contain too much 



PREFACE ix 

extraneous matter and use too much space in covering the really 
imiportant and salient points. Much of the illustrative matter in 
such readings the student can supply for himself from his observa- 
tion or from his supplementary reading. Consequently I have taken 
from books and articles what has suited my purposes, and, by cutting 
out what is not essential, I have reduced nearly all the readings 
to one-half or one-fourth of their former length. In some cases 
the reduction has been even more drastic. In this process of adap- 
tation the aim has been to preserve the original words of the author. 
Only a word or two has been changed now and then for the sake of 
coherence. Since, however, the purpose of the book is pedagogical, 
no attempt has been made to indicate the omissions from the origin- 
als. Further the foot-notes contained in the original have been 
omitted. Explanatory notes, perhaps necessary were the book to be 
put into general use, are quite unnecessary so long as it is used by 
instructors who know the purpose of each selection and who have 
been more or less responsible for the book. For the sake of improv- 
ing the looks of the page the references to the sources from which 
the readings come are all put in the table of contents. 

A part of the material in this book appeared in mimeographed 
form a year ago, and was tried out in the class-room. Such read- 
ings as met the test have been included in the present volume, though 
changes have been made in nearly all of them in the light of this 
class-room experience. A great deal of the material in the present 
volume has not had that test, and is used here for the first time. 

In concluding I wish to acknowledge my obligations to my col- 
leagues at the University of Michigan who, in various ways too 
numerous to be mentioned here, have contributed to the production 
of this book. My obligations to Prof. F. M. Taylor, Mr. S. M. 
Hamilton, and Mr. Henry Rottschaefer have been particularly great. 
I wish also to express my appreciation of the valuable aid received 
from Prof. Carl E. Parry, of Ohio State University, in connection 
with the section on labor problems. My obligations to various pub- 
lishers for permission to use material which is copyrighted are 
acknowledged in detail in the table of contents. 

Walton H. Hamilton. 

The University of Michigan, 
January 22, 1914. 



TABLE OF CONTENTS. 

I. 

. THE DEVELOPMENT OF ^lODERN INDUSTRIAL 

SOCIETY. 

A. Ideals Underlying Modern Industrial Development. 

1. The Essential Characteristics of Modern Indiis- 

triahsm. By ^^'alton H. Hamilton i 

2. The Contribution of Christian Teaching to Indus- 

trial Development. By William Cunningham. . 4 
Adapted from ^-lii Essay on Western Civilizaiion in its 
Economic Aspects, II, 6-10, 35-36. 

B. The JManor^ A Sele-Sufficient Economy. 

3. A vShort vSketch of the English Manor. 

By William J. Ashley 6 

Adapted fro'in An Introduction to English Economic 
History and Theory, I, 5-49. 

4. The Economic Independence of the Manor. 

By J. Dorsey Forrest 9 

Adapted from The Development of Western Civilization, 
163-167. Cop.vright by the Universit}' of Chicago. 

C. Selected Gild Documents. 

5. Ordinances of the Gild Merchant of South- 

ampton 10 

University of Pennsylvania, Translations and Reprints 
from the Original Sources of European History, Vol. 
//, No. I, English Towns and Gilds, 12-17. 

6. Articles of the Spurriers of London 12 

University of Pennsylvania, Ibid., 21-22. 

7. Ordinances of the White-Tawers 13 

University of Pennsylvania, Ibid., 23-25. 

8. Preamble to the Ordinances of the Gild of the 

Tailors, Exeter 13 

University of Pennsylvania, Ibid., 26. 



xii TABLE OF CONTENTS 

D. The Poi,icy oi? the Town. 

9. The Spirit of Solidarity in the Mediaeval Town. 

By Walton H. Hamilton 13 

E. The Development oe Commerce. 

10. A Definition of Commerce. By J. Dorsey Forrest. 16 

Adapted from The Development of Western Civilisation, 
194. Copyrig-bt by The University of Chicago. 

11. The Attitude of the Alediaeval Church toward 

Commerce. By William J. Ashley . 17 

Adapted from An Introduction to Englisli Economic 
History and Theory, I, 126-132. 

12. The Contribution of the Church to Commercial 

Development. By J. Dorsey Forrest 19 

Adapted from 7'he Development of Western Civilisation, 
176-179, 190-194. Copyright by The University of 
Chicago. 

13. Italian Commerce and Industry in the Fourteenth 

Century. By Thomas B. Macaulay 21 

Adapted from the essay on Machiavelli. 

F. Mediaeval Commercial Practices. 

14. A Prohibition of Certain Commercial Practices. . 2.1 

Adapted from the Lazvs of Henry HI and Edtuard I. 

15. Mediaeval Tricks of Trade. 

By Berthold von Regensburg 22 

Adapted from a thirteenth century sermon, translated 
in ■Coui.TGN'j A Mcdiaezral Garner, 348-354. 

G. Early Economic Theory. 

16. The Characteristics of Mercantilist Doctrine. 

By John Kells Ingram 25 

x\dapted from A History of Political Economy, 37-40. 

H. Aspects oe the Industrial Revolution. 

17. The Characteristics of the English People. 

By Alfred Marshall 27 

Adapted from Principles of Economics, sixth edition, 
740-74L 

18. English Industry on the Eve of the Revolution. 

By Arnold Toynbee 28 

Adapted from Industry and Democracy, in Lectures on 
the Industrial Revolution, 179-188. 



TABLE OF CONTENTS xiii 

19. The Antecedents of the Revolution. 

By WilHam Cunningham 31 

Adapted from An Essay on Western Civilisation in its 
Economic Aspects, II, 225-228. 

20. The Nature and Scope of the Industrial Revolu- 

tion. By J. H. Clapham 33 

Adapted from Chapter XXIII, Economic Change, in A 
Cambridge Modern History, X, 727-739. 

21. How Machinery Invades Correlated Industries. 

By Karl Marx 36 

Capital, I, 379-380. 

22. A Socialistic View of the Industrial Revolution. 

By Allan L. Benson 37 

Adapted from The Truth about Socialism, 6-7. Copy- 
right by the author. 

23. The Significance of the Revolution. 

By G. Grant Robertson 38 

Adapted from England under the Hanoverians, 328-346. 

I. C[tar.acte;ristics of the New Industrialism. 

24. The Function of Capital. By J. Dorsey Forrest. . 42 
Adapted from The Development of Western Civilisation, 

331-338- Copyright by The University O'f Chicago. 

25. The Characteristics of the Factory System. 

By Carl Biicher 43 

Adapted from Industrial Evolution, 173-176, translated 
by S. Morley Wickett. Copyright by Henry Holt and 
'Company. 

26. The Machine Process. By Thorstein B. Veblen. . 44 
Adapted from The Theory of Business Enterprise, S-19. 

Copyright by Charles Scribner's 'Sons. 

J. The Extension oe Modern Industrialism. 

27. The Competitive Victory of Western Culture. 

By J ames Bryce 47 

Adapted from an address delivered before The Interna- 
tional Congress of Historical Studies, London. 



xiv TABLE OF CONTENTS 



II. 



FUNDAMENTAL INSTITUTIONS OF MODERN 
INDUSTRIAL SOCIETY. 

A. Compp:t].tion. 

28. A Condemnation of Competition. 

By Charles Kingsley 49 

Cheap Clothes and Nasty^ in Alton Locke, Ixviii-lxix. 

29. Economic Activity as a Struggle for Existence. 

By Arthur Fairbanks 49 

Adapted from Introduction to Sociology, 239-254. 

30. Competition and CVganization. 

By Charles H. Cooley 51 

Adapted from an article in The American Journal of 
Sociology, XIII, 655-658. 

31. The Competitive Principle in State-Owned Indus- 

tries. By Westel Woodbury Willoughby. ... 52 
Adapted from Social Justice, 308-310. Copyright by The 
Macmillan Company. 

32. Competition and Selfishness. By S. J. Chapman. . 53 
Outlines of Political Economy, 17-18. 

33. Competition and Social Service. By J. A. Hobson 54 
Adapted from The Industrial System, 307-308. 

34. State Determination of the Plane of Competitive 

Action. By Henry C. Adams 55 

Adapted from The Relation of the State to Industrial 
Activity, 39-47. 

B. The Legai, System. 

35. The Economic Foundation of Law. 

By Archelle Loria 5^ 

Adapted from The Economic Foundations of Society, 
80-81. Translated by L. M. Keasbey. 

36. Law in Political Economy. By John R. Commons. 58 
Adapted from The Distribution of Wealth, 59. Copyright 

by The Macmillan Company. 

37. Conflict of Social Welfare and Individual Liberty, 

By Lucius Polk McGehee 59 

Due Process of Lazv, 361-363. Copyright by The Edward 
Thompson Company. 

38. Uniformity in Law. By Frank J. Goodnow 60 

Adapted from Social Reform and the Constitution, 
\ 147-148. Copyright by The Macmillan Company. 



TABLE OF CONTENTS : xv 

C. Private; Property. 

39. A Definition of Private Property. 

By Richard T. Ely 61 

Adapted from Socialism and Social Reform, 306. Copy- 
right by Thomas Crowell and Company. 

40. The Right of Property. By John Austin 61 

Lectures on Jurisprudence, II, 828. 

41. Property and the Distribution of Wealth. 

By John Stuart Mill 62 

Adapted from The Principles of Political Economy, I, 
258, 275-295. 

42. The Economic Eoundation of Property. 

By F. W. Taussig 63 

Adapted from Principles of Economics, II, 248-257. 
Copyright by The Macmilian Company. 

D. Freedom of Contract. 

43. Freedom of Contract and Individual Liberty .65 

Butchers' Union Company vs. Crescent City Company. 
Ill U. S. 756. 

44. Freedom of Contract and the General Welfare. . . 66 

U. S. vs. Trans-Missouri Freight Association. 58 Fed. 
Rep. 58. 

45. Static Assumptions of Contractual Freedom. 

By Roscoe Pound 66 

Adapted from Liberty of Contract, 18 Yale Law Journal, 
454-487- 

46. Individualism and Freedom of Contract. 

By Thorstein B. Veblen 69 

Adapted from The Theory of Business Enterprise, 271- 
278. Copyright by Charles Scribner's Sons. 

E. Credit. 

47. The Social Importance of Credit. 

By William Roscher. 71 

Adapted from Principles of Political Economy, I, 268- 
274. Translated by John J. Lalor. 

48. The Sensitiveness of the System of Credit. 

By Edward D. Jones 72 

Adapted from Economic Crises, 153-178. Copyright by 
The Macmilian Compan}'. 

F. The Corporation. 

49. The Nature of the Business Corporation. 

By Harrison S. Smalley 74 



xvi TABLE OF CONTENTS 

50. Distribution of Risk and Ownership in the Corpor- 

ation. By W. H. Lyon yy 

Adapted from Corporations, a Book of Corporation Fin- 
ance, 6-16. Copyright by the author. 

51. Methods of Stock- Watering 79 

Tlie Final Report of the Industrial Commission, XIX,, 
406-407. 

52. The Function of the Corporation. 

By F. W. Taussig 80 

Adapted irom The Principles of Political Economy, 
86-89. Copyright by The Macmi'llan Company. 

53. Disadvantages of the Corporate Form. 

By Henry Rogers Seager 83 

Principles of Economics, 161-163. Copyright by Henry 
Holt and Company. 

54. Rights and Duties of Corporations. 

By Henry C. Adams 84 

Economics and Jurisprudence, 16-18. 

0. Specui^ation. 

55. The Zoology of Stock Speculation. 

By Charles Duguid 86 

Adapted from The Stock Exchange, 65-71. 

56. Why the Prices of Securities Rise and Fall. 

By Francis W. Hirst 88 

Adapted from The Stock Exchange, 199-210. Copyright 
by Henry Holt and Company. 

57. The Social Value of the Stock Exchange. 

By William C. Van Antwerp 91 

Adapted from The Stock Exchange from Within, 6-32. 
Copyrig'ht by the author. 

58. The Functions of Exchanges. 

By Charles A. Conant 93 

Adapted from Wall Street and the Country, 88-116. 
Copyright by the author. 

59. Speculation and the Preservation of Competition. 

By Harrison H. Brace 95 

Adapted from The Value of Organised Speculation, 
205-221. Copyright by Hart, Schaffner and Marx. 

60. The Experience of Germany with Stock Exchang- 

es 98 

Adapted from The Report of the Hughes' Committee 
{N. Y.) on Speculation in Securities and Commodities. 



TABIB OF CONTENTS ' xvii 

III. 
THE SOCIAL CONTROL OF INDUSTRIAL ACTIVITY. 

A. SociAiv Progre;ss. 

6i. The Nature of Social Progress. By L.T. Hobhouse. loi 
Adapted from Social Evolution and Political Theory, 
7-25. Copyright 'by The Columbia University Press. 

B. Ti-iR Rise o^ Laisskz-Faire. 

62. The Individualistic Spirit of America. 

By Walter E. Weyl 104 

Adapted from The Neiv Democracy, 36-49- Copyright 
by The Macmillan Company. 

C. Historical Aspects oe the Laissez-Faire Concept. 

63. The Fundamental Law of Nature. 

By William Blackstone 108 

Commentaries on the Laws of England, bk. i, sect. 2. 

64. A Diatribe Against Human Institutions. 

By J. J. Rousseau 108 

£inile on l' Education, liv. i. 

65. A Plea Against Governmental Restraints. 

By Adam Smith 109 

The Wealth of Nations, bk. iv, ch. ii. 

66. A General Condemnation of Government. 

By William Godwin no 

Adapted from An Enquiry concerning Political Justice 
and its Influence on General Virtue and Happiness, 
S14, 561, 564, 555, 168, 575, 579- 

67. The Identity of Individual and Social Good. 

By Piercy Ravenstone 1 1 1 

A Fezv Doubts as to the Correctness of Some Opinions 
Generally Entertained on the Subjects of Population 
and Political Economy, 2-3. 

68. A Protest against Useless Restrictions. 

By Jeremy Bentham 112 

Truth against Ashurst, 234. 

D. The Character and Meaning oe Laissez-Faire. 

69. The Economic-PoHtical Philosophy of Individual- 

ism. By Albert V. Dicey 113 

Adapted from Lectures on the Relation between Law and 
Public Opinion in England during the Nineteenth 
Century, 125-149. Copyright by Macmill'an and Com- 
:v pany. 



xviii TABLE OF CONTENTS 

70. The Authoritative Basis of the Laissez-Faire Con- 

cept. By Walton H. Hamilton 115 

71. The Unscientific Character of Laissez-Faire. 

By J. E. Cairnes 117 

Adapted from Political Economy and Laissez-Faire, in 
Essays in Political Economy, 240-252. 

72. How Laissez-Faire has Worked out in Practice. 

By L. T. Hobhouse 119 

Adapted from Liberalism, 81-101. Copyright by Henry 
Holt and Company. 

E. Thu Limits oi' the; Province of Government. 

73. The Individualistic Conception of the Province of 

■ Government. By John Stuart Mill 121 

■ Adapted from Principles of Political Economy, bk. v, 

ch. xi. 

74. The Collectivis'tic Conception of the Province of 

Government. By Albert V. Dicey 126 

Adapted from Law and Public Opinion in England, 258- 
301. Copyright by M'acmillan and Co'm'pany. 

F. Aspects oe the Movement for Sociae Controe. 

75. A Refutation of the Evolutionary Argument 

against Social Control. By W. Lyon Blease . . . . 129 
Adapted from A Short History of English Liberalism, 

■ 327-341. Copyright by T. Fisher Unwin. 

76. The Futility of Utopian Legislation. 

By George Chatterton-Hill . 132 

Adapted from Heredity and Selection in Sociology, 
439-443- 
yy. The Necessity for a New Social Basis in Law. 

By Justice Oliver W. Plolmes 133 . 

Lochner vs. N. Y., 198 U. S. 74. 

78. The Logic of Social Reform. By Herbert Croly. . 134 

Adapted from The Promise of American Life, 150-154. 
Copyright by The Macmi'Ilan Company. 

79. A Program of Social Reform. 

By Woodrow Wilson 135 

Adapted from the Inaugural Address, March 4, 1913. 

G. Conservative Factors in Current Industrial Deveeop- 
ment. 

80. A Defense of an Industrial Aristocracy. 

By W. H. Mallock 138 

Adapted from Aristocracy and Evolution, 152-175. Copy- 
right by The Macmillan Company. 



TABLU OF CONTENTS xix 

8i. Judicial Decisions and Social Reform. 

By Frank J, Goodnow 140 

Adapted from Social Reform and the Constitution, 290- 
291, 307-308- 

82. The Dominance o£ the Entrepreneur View-Point 

in Politics. By Walton H. Hamilton 142 

H. Governmental Means of Sociae Reform. 

83. Taxation as a Means of Social Control. 

By Adolph Wagner 146 

Adapted from Finanszvisseuschaft, I, paragraph 27, and 
II, paragraph 159. 



IV. 
THE TARIFF PROBLEM. 

A. The Factors in the Problem. 

84. The Basis of International Trade. 

By Alvin S. Johnson 148 

Adapted from Introductory Economics, 273-282. Copy- 
right by The School of L,i'beral Arts and Sciences for 
Non-Residents. 

85. The Nature and Classification of Import Duties. 

By George M. Fisk 149 

Adapted from International Commercial Policies, 62-67. 
Copyright by The Macmillan Company. 

86. A Definition of Free-Trade. By W. G. Sumner. . 150 
Protectionism, 17. 

87. A Definition of Protection. By George F. Hoar. . 151 

Quoted in Atkinson, Taxation and Work, 8l 

B. Tariff History. 

88. A Short Sketch of American Tariff History. 

By Harrison S. Smalley 151 

C. Aspects of the Framing of a Tariff Bile. 

89. Resolution of the National Wool Growers Associa- 

tion and the National Association of Wool Man- 
ufacturers 159 

Presented to the Ways and Means Committee of the 
House of Representatives, 60th Cong., 2nd Sess., 
House Document 143, 533i- 



XX . TABLE OF CONTENTS 

90. An Argument for High Duties upon Woolen 

Goods. By N. T. Folwell 159 

Presented to the Ways and Means Committee, Ibid., 
5341- 

91. How Duties are Sometimes Secured. 

By William Whitman and S. N. D. North 160 

Presented to the Ways and Means Committee, Ibid., 
5492-5493. 

92. The Conflict of Interests 161 

Based upon evidence presented in The Congressional 
Record, 1909. 

93. The Play of Special Interests. By A. S. Bolles. . . 161 

The Financial Flistovy of the United States, 479-480. 

D. Tpie Undivrwood-Simmons Tariff Act. 

94. Theory of a Competitive Tariff 162 

Report to Accompany H. R., 3321, 63rd Cong., ist Ses- 
sion, Report No. 5, xvi-xviii. 

95. Excerpts from the Underwood-Simmons Act 165 

The Tariff Act of October 3, 1913, on Imports into the 
United States, 1-03. 

E. The Case; for Protection. 

96. Protection and Industrial Transformation. 

By Friedrich List 170 

Adapted 'from The National System of Political 
Economy, passim. 

97. What Protection has Done. 

By Robert ElHs Thompson 171 

Protection to Home Industry, 57-58. 

98. Eree-Trade Destroys the Earm. Anonymous .... 172 

Clipping from the Chicago Journal of Commerce, date 
unknown. 

99. America's Allegiance to Protection. 

By Albert J. Eeffingwell 174 

Adapted from an article in the London Contemporary 
Reviezu, July, 1880. 

100. Protection and the Formation of Capital. 

By Alvin S. Johnson 176 

Adapted from an article in The Political Science Quar- 
; terly, XXIII, 221-241. 



TABLB OP CONTENTS xxi 

F. Thk Cas^ against Protection. 

loi. Infant Industries and the Tariff. 

By Frank W. Taussig 179 

Adapted from Protection to Young Industries as Applied 
in the United States. Copyright 'by the author. 

102. The Limited Industrial Effects of Protection. 

By Alvin S. Johnson 182 

Introduction to Economics, 87-89, 356-357. Copyright by 
D. C. Heath and Company. 

103. Free-Trade and Depopulation. By C. F. Bastable. . 183 

The Theory of International Trade, 160-162. Copyright 
by iMaomillan and Company. 

104. American Free-Trade and American Prosperity. 

By George Baden-Powell 185 

Adapted from State Aid and State Interference, Z^-Zl- 
Copyright by Chapman and Hall. 

105. An Economic and Moral Indictment of Protection. 

By WilHani Smart 187 

Adapted from T//,? Return to Protection, 90-94. Copy- 
right by Macmillan and Company. 

G. The; Influence of thk Tariff on Wages. 

106. The Early Uses of the Wages Argument. 

By F. W. Taussig 188 

The Tariff History of the United States, 65-66. Copy- 
right by G. P. Putnam's Sons. 

107. Protection's Benefits Go to Labor. 

By Theodore Justice 189 

60th Cong., 2nd Sess., House Document 145, 5267. 

108. What Fixes the Rate of Wages? 

By Simon N. Patten 189 

Adapted from The Economic Basis of Protection, 59-63. 
Copyright 'by J. B. Lippencott Com'pany. 

109. The Effect of Industrial Changes on Wages. 

By Alvin S. Johnson 190 

Adapted from Introduction to Economics, 359-361. Copy- 
right by D. C. Heath and Company. 

IT. Current Arguments for Freer Trade. 

no. Free Trade and International Peace. 

By Rt. Hon. Winston S. Churchill 192 

Adapted from a speech reported in The Proceedings of 
the International Free Trade Congress, 5-8. 



xxii TABLB OP CONTENTS 

111. A Socialist's Plea for Free Trade. 

By Edward Bernstein 194 

Ad'apted from a paper reported in, Ibid., 27-28. 

112. Freer Trade and Industrial Efficiency. 

By William C. Redfield 195 

Adapted from The New Industrial Day, 81-102, 120, 122, 
127, 130-131. Copyright by The Century Company. 

I. Scientific Revision oe the Tariee. 

113. Economic Investigation the Basis for Tariff Legis- 

lation. By Henry C. Emery 200 

Adapted from an article in The American Economic Re- 
view, H, 20-25. Copyright by The American Economic 
Association. 

114. The Impossibility of Ascertaining Costs. 

By H. Parker Willis 202 

Adapted from an articl'e in The Journal of Political 
Economy, XIX, 374-376. 



THE CURRENCY PROBLEM: 

A. The Money Trust. 

115. Is there a Money Trust ? By George W. Dowrie . . 204 

B. SUSCEPTIBIEITY OE ModERN INDUSTRIALISM TO DISTURB- 

ANCE. 

116. Business Organization and the Industrial Equilib- 

rium. By Edward D. Jones 208 

Adapted from Economic Crises, 21-57. 

117. Extent of the Use of Credit Instruments in Busi- 

ness. By David Kinley 211 

Adapted from The Use of Credit Instruments in Pay- 
ments in the United States, 199-202, 6ist Cong., 2nd 
Sess., Senate Documents, Vol. 9. 

C. The Industriae Cycle. 

118. The Periodicity of Fluctuations in Trade. 

By S. J. Chapman 212 

Outlines of Political Economy. 254-255. 

119. The Periodicity of Commercial Crises. 

By J. S. Nicholson 213 

Adapted from Principles of Political Economy, II, 211- 
214. 



TABLB OF CONTENTS xxiii 

D. GeneraIv Over-Production. 

120. The Impossibility of Over-Production. 

By John Stuart Mill 214 

Adapted from The Principles of Political Economy, II, 
105-113. 

121. A Modern Statement of the Over-Production 

Theory. By Paul Leroy-Beaulieu 216 

Traite d'Economie Politique, IV, 450-451. 

122. The Meaning of the Over-Production Theory. 

By Theodore E. Burton 216 

Crises and Depressions, 126. Copyright by D. Appleton 
and Company. 

E. Ge;ne;rai^ Causes oe Crises and Depressions. 

123. A Sociahstic Theory of Crises. By August Bebel. 217 

Adapted from Women under Socialism, translated by 
Meta L. Stern, 338-340. Copyright by The Socialist 
Literature Company. 

124. Why a Crisis Arises. By J. Lawrence Laughlin. . 218 

Banking Reform, 65-66. Copyright by the National Citi- 
zens' League for the Promotion of a Sound Banking 
System. 

125. How a Rise in Prices Culminates in a Crisis. 

By Irving Fisher 219 

Adapted from Elementary Principles of Political Econ- 
omy, 187-189. Copyright by The Macmillan Company. 

126. The Capitalization Theory of Crises. 

By Frank A. Fetter 220 

Adapted from Principles of Economics, 353-354. Copy- 
right by The Century Company. 

F. Crises and Industrial Classes. 

127. The Order of Events in a Crisis. 

By Arthur T. Hadley 221 . 

Adapted from Economics, 297-299. Copyright by G. P. 
Putnam's Sons. 

128. How Crises Affect Various Classes. 

By J. Lawrence Laughlin - • ■ 223 

Adapted from Banking Reform, 286, 306, 316, 291. 

G. The Panic oe 1893. 

129. The Causes of the Panic. By W. Jett Lauck 224 

Adapted from The Causes of the Panic of 1893, 118- 
121. Copyright by Hart, Schaffner and Marx. 



xxiv TABLE OP CONTENTS 

130. The Course of the Panic. By Alexander D. Noyes. 227 
Adapted from Forty Years of American Finance, 182- 

206. Copyright by G. P. Putnam's Sons. 

131. A Week of the Panic 229 

The Commercial and Financial Chronicle, July 29, 1893, 
162. 

132. The Premium on Currency 231 

The Commercial and Financial Chronicle, August 12, 
1893, 196. 

133.' The Hoarding of Currency. By J. DeWitt Warner. 231 
Sound Currency Year Book, 1896, 240, 

134. The Effect on Trade 232 

The Commercial and Financial Chronicle, September 16, 
1893, 446. 

135. Various Aspects of the Panic 232 

Adapted from Bradstreet's August 5 and 12, 1893, 495, 
SU- 
IT. Th]^ Panic of 1897. 

136. Is a Panic Imminent? By Henry Hall 234 

Adapted from an article in Moody's Magazine, III, 295. 
Copyright. 

137. The Irrepressible Crisis. By W. H. Lough, Jr.. . 236 
Adapted from an article in Moody's Magazine, III, 586- 

592. Copyright. 

138. Conditions Leading up to the Panic 239 

Adapted from an editorial in Moody's Magazine, IV, 
103-109. 

139. Business Conditions in August 240 

' Adapted from an editorial in Moody's Magazine, IV, 203- 

209. Copyright. 

140. The Course of the Panic. By Horace White. . . . 241 
Adapted from Money and Banking, third edition, 411- 

41S. 

14T. Shipment of Currency to the Interior 243 

The Commercial and Financial Chronicle, October 10, 
1908, 84. 

142. Resolutions of the Atlanta Clearing House 244 

143. Estimate of Money Hoarded 245 

Adapted from an editorial in Moody's Magazine, V, 80. 
Copyright. 

144. The Panic and the Depreciation of Gold 245 

Adapted from an editorial in Moody's Magazine, V, 

84-85. Copyright. 



TABLB OF CONTENTS xxv 

145. The Extent of the Depression 246 

Adapted from an editorial in Moody's Magazine, V, 
151-154. Copyright. 

146. Industrial Effects of the Crisis 247 

Bradstreet's, February i, 1908. Copyright. 

r. Reform oi? the; Currency. 

147. Do We Need an Elastic Currency? 

By F. M. Taylor 247 

Adapted from an article in The Political Science Quar- 
terly, XI, 152-157. Copyright. 

148. What America Can Learn from European Bank- 

ing. By A. Piatt Andrew 251 

Adapted from The Purpose and Origin of the Proposed 
Banking Legislation, 13-19. 

149. Currency Reform and Concentration of Credit... 254 

Report of the Pujo Committee, House Document 1593, 
62nd Cong., 3rd Sess., 1 59-161. 

150. The Defects in the Present Banking System 257 

Report of the National Monetary Commission, 62nd 

Cong , 2nd Sess., Senate Document, 243, 6-16. 

151. The High Cost of Farming. By B. F. Yoakum. . 259 
Adapted from an article in The World's Work, XXIV, 

5-19-533- Copyright. 

152. Agricultural Credit in the United States. 

By E. W. Kemmerer 265 

Adapted from an article in The American Economic 
Review, III, 863-872. Copyright by The American 
Economic Association. 

VI. 

TtlE PROBLEAl OF RAILROAD RATES AND 
REGULATION. 

A. The Fundamentae Factors in the Railroad ProbeEm. 

153. The Extent of American Railway Interests. 

By I. Leo Sharf man 270 

I5_4. The Public Nature of the Railroad Business. 

By Walter Chadwick Noyes 271 

American Railroad Rates, 1-3. Copyright by Little, 
Brown, and Company. 

155. The Economic Basis of Regulation. 

By I. Leo Sharfman. 272 



xxvi TABLB OF CONTENTS 

B. Discriminatory Practices o^ the Raii,roads. 

156. Standard Oil and Railroad Rebates. 

By Ida M. Tarbell -276 

Adapted from The History of the Standard Oil Com- 
pany, I, 54-62. Copyright fcy The Macmillan Com- 
pany. 

157. Discriminations between Commodities. 

By Albert N. Merritt 277 

Adapted from Federal Regulation of Railroad Rates, 
34-36. Copyrig-ht hy Hart, Schafifner and Marx. 

158. Variety in Railway Discrimination. 

By Frank Parsons 279 

Adapted from The Heart of the Railroad Problem, 57-65. 
Copyright by the author. 

159. Recent Forms of Railway Discrimination. 

By William Z. Ripley 281 

Adapted from Railroads, Rates and Regulation, 195-209. 
Copyright by LoJigmans, Green and Company. 

C. The Nature and Extent oe Regueation. 

160. Causes of Complaint against the Railroad System. 

By Logan G. McPherson 283 

Adapted from Railroad Freight Rates in Relation to the 
Industry and Commerce of the United States, 245-247. 
Copyright by Henry Holt and Comipany. 

161. The Provisions of the Inter-State Commerce Act. 

By Logan G. McPherson , 285 

Adapted from The Working of the Railroads, 248-250. 
•Copyright by Henry Hoh and Company. 

162. The Provisions of the Elkins Act. 

By Henry S. Plaines 286 

Restrictive Raihvay Legislation, 263-264. Copyright by 
The Macmillan Company. 

163. The Provisions of the Hepburn Bill. 

By Logan G. McPherson 286 

Adapted from The Working of the Railroads, 255-259. 
Copyright by Henry Holt and Company. 

D. Aspects of Rate Making. 

164. Freight Classification. By William Z. Ripley. . . . 288 
Adapted from Railroads, Rates and Regulation, 297-304. 

Copyrig'ht by Longmans, Green and Company. 

165. Competitive Factors in Rate-Making. 

By Emory R. Johnson and Grover C. Huebner; 290 

Adapted from Railroad Traffic and Rates, I, 351-359. 
Copyright by D. Appleton and Company. 



TABLE OP CONTENTS xxvii 

i66. The Futility of Costs as a Basis for Rates. 

By Sydney Charles Williams 292 

Adapted from The Ecojioiiiics of Railway Transport, 
189-198. 

167. The Rate Theory of the Interstate Commerce 

Commission. By M. B. Hammond 295 

Adapted from Railroad Rate Theories of the Interstate 
Cojniiierce Commission, 192-195. Copyright by The 
Quarterly Journal of Economics and by Harvard 
University. 

E. Thd Theory oe Railroad Valuation, 

168. Market Value as a Basis for Rates. 

By Robert H. Whitten 297 

Adapted from Valuation of Public Service Corporations, 
53-55- Copyright by the author. 

169. Physical Valuation as the Basis of Rates. 

By Samuel O. Dunn 297 

Adapted from The American Transportation Question, 
84-95. Copyright by D. Appleton and Company. 

170. The "Railway- Value" of Land. 

By Justice Charles H. Hughes 301 

Simpson vs. Shcpard, 2i Supreme Court Reporter, 761- 
763. Adapted from the opinion of the court. 



VH. 
THE PROBLEM OF THE TRUSTS. 

A. The Inevitableness oe Monopoly. 

171. Monopoly, the Result of Natural Growth. 

By George Gunton 303 

Adapted from l^rusts and the Public, 32-34. Copyright 
by D. Appleton and Company. 

172. Monopoly, the Result of Artificial Conditions. 

By Woodrow Wilson 304 

Adapted from The New Freedom, 163-169. Copyright by 
Doubled'ay, Page and Company. 

B. Conditions F.woring the Growth oe Monopolies. 

173. The Conditions of Monopolization. 

By A. C. Pigou ' 307 

Adapted from Wealth and Welfare, 180-190. Copyright 
by Macmillan and Company. 



xxviii TABLE "OP CONTENTS 

174. Efficiency, Large-Scale Production versus 'Mo- 

nopoly. By Charles J. Bullock 311 

Adapted from Trust Literature : A Survey and a Critic- 
ism, in The Quarterly Journal of Bconomics, XV, 190- 
210. Copyright. 

175. The Causes of Trusts. By Chester W. Wright. . . 317 
Adapted from The Trust Problem — Prevention versus 

Alleviation, in The Journal of Political Economy, XX, 
578-581. Copyright. 

176. English Industrial Conditions and Monopoly. 

By Hermann Levy 319 

Adapted from Monopoly and Competition, 304-311. 

C. The Social Vai^ue of MonopoIvY. 

177. The Industrial Efficiency of Monopolies. 

By George W. Perkins 321 

Adapted from The Modern Corporation, 5-8, an address 
delivered before Columbia University, February 7, 
1908. 

178. The Savings of Combination 323 

Report of the Industrial Commission on Trusts and In- 
dustrial Combinations, XIII, vi-vii. 

179. Monopoly and Efficiency. By Louis D. Brandeis. 325 
Adapted from an article in American Legal Nezvs, 

XXIV, 8-12. 

D. Types of Monopoly. 

180. A Classification of Monopolies. By Richard T. Ely 328 

Monopolies and Trusts, 83-84. Copyright by The Mac- 
miillan Company. 

iSi. Forms of Monopoly Organization. 

By Charles R. Van Hise 330 

Adapted from Concentration and Control, 60-72. Cop\-- 
right by The Macmillan Company. 

E. The Ineeuence of Monopoly on Price. 

182. Monopoly Price a Competitive Price. 

By Franklin Henry Giddings 333 

Adapted from Democracy and Empire, 138-142. Copy- 
right by The Macmillan Company. 

183. Monopoly Control of Price 336 

Final Report of the Industrial Commission, XIX, 620- 

622. 

184. Cut-Throat Prices: The Competition that Kills. 

By Louis D. Brandeis 33^ 

Adapted from Harper's Weekly, November 15, 1913, 11- 
12. Copyright by The McClure Publications. 



TABLE OF CONTENTS xxix 

F. Typical Monopolistic Practices. 

185. Competitive Methods of Standard Oil. 

By James Rudolph Garfield 341 

Adapted from The Report of the Commissioner of Cor- 
porations on the Transportation of Petroleum, xxi- 
xxyi. 

186. Monopolistic Practices of the American Tobacco 

Company. By Chief Justice Edward D. White 344 

U. S. vs. American Tobacco Co., 221 U. S. 106. 

187. Dealers' Agreement with the American Tobacco 

Company 345 

Adapted from Neiv York Senate Documents, 1897, No. 
40, 878-883. 

188. The Shoe Machinery Trust. By James H. Vahey 346 
An article in Moody's Magazine, III, 347-348. Copyright. 

189. Practices of the American Sugar Refining Com- 

pany. By Charles R. Van Hise 348 

Adapted from Concentration and Control, 149-150. Copy- 
right by The Macmillan Compan}'. 

G. Labor and Monopoly. 

190. Labor and the United States Steel Corporation. 

By John A. Fitch 349 

Adapted from an article in The Annals of the American 
Academy of Political and Social Science, XLHI, 
10-19. Copyright. 

191. The United States Steel Corporation and Labor. 

By Raynal C. Bolhng 354 

Adapted from an article in The Annals of the American 
Academy of Political and Social Science, XLHI, 38- 
46. Copyright. 

H. The Sherman Anti-Trust Act in Theory and Prac- 
tice. 

192. The Sherman Anti-Trust Act 357 

193. The Meaning of Restraint of Trade. 

By Chief Justice Edward D. White 357 

The Standard OH Company of Nezv Jersey vs. United 
States, 221 U.S. i. 

194. Unreasonable Restraint of Trade. 

By Justice J. M. Plarlan.- 358 

The Standard OH Companv of Nen' Jersey z's. United 
States. 221 U. S. 82. 



XXX TABLE OP CONTENTS 

195. An Interpretation of the Court Decisions. 

By Theodore E. Burton 359 

Adapted from Corporations and the State, 159-170. Copy- 
right by D. Appleton and Company. 

196. Dissolution of the Standard Oil Company 361 

A letter sent to the stockholders by the Standard Oil 

Company of New Jersey. 

197. The Result of the Dissolution. 

By Arthur Jerome Eddy 362 

Adapted from The Nezv Competition, 258-260. Copy- 
right by D. Appleton and Company. 

I. Proposals for Controlling thl Trusts. 

198. A Proposal of an Interstate Trade Commission. 

By Bruce Wyman 364 

Adapted from an article in The Annals of the American 
Academy of Political and Social Science, XLIII, 67- 
yZ- Copyright. 

199. Control of Monopoly by a Trade Commission. 

By William Dudley Foulke 366 

Adapted from an article in The Journal of Political 
Economy, XX, 413-415. 

200. Prescription of Conditions for Interstate Com- 

merce. By John Sharp Williams and Robert 

R. Reed 368 

Senate Document 4747, 62nd Cong., 2nd Sess. 

201. A Socialist View of State Regulation. 

By John Spargo and George Louis Arner. ... 371 
Adapted from Elements of Socialism, 176-178. Copyright 
right by The Macmillan Company. 

VIII. 
THE PROBLEM OF POPULATION. 

A. The Question of Numbers. 

202. The Real Impediment to the Establishment of a 

Perfect Industrial State. By Thomas A. Huxley 373 
Adapted from Evolution and Ethics, Prolegomena, 
v-vii. 

203. Early Views of the Value of a Large Population. 

By Sir William Temple, Sir Josiah Child, 
Daniel Defoe, Adam Ferguson, Sir James 
Steuart, and Arthur Young '. 374 



TABLE OF CONTENTS xxxi 

B. Thk Malthusian Theory of Population. 

204. The Social Crisis at the Time of Malthus. 

By Francesco S. Nitti 376 

Adapted from Population and the Social System, 13-18. 

205. The Theory of Population. 

By Thomas Robert Malthus 378 

Adapted from An Essay on the Principle of Population, 
or a View of the Past and Present Effects on Human 
Happiness, sixth edition, I, 1-24. 

206. A Comparison of Malthus and Darwin. 

By J. Shield Nicholson 381 

Adapted from Principles of Political Economy, I, 177- 
179. 'Copj'right by Macmilian and Company. 

207. Malthusianism a Support of Capitalism. 

By Piercy Ravenstone 382 

Adapted from A Few Doubts as to the Correctness of 
Some Opinions Generally Entertained on the Subjects 
of Population and Political Economy, S-24. 

208. An Early American View of Population. 

By Henry C. Carey 384 

Principles of Social Science, first edition, I, 91-93. 

209. Malthus versus the Malthusians. 

By L. T. Hobhouse 386 

Adapted from Social Evolution and Political Theory, 13- 
16. Copyright by the Colum'bia University Press. 

C. The Relation oe Immigration to the Population 

Question. 

210. The Falling Birth-Rate. By Edward Alsworth Ross 388 

Adapted from Changing America, 32-49. Copyright by 
The Century Company. 

211. The Immigration Invasion. 

By Frank Julian Warne 392 

Adapted from The Immigrant Invasion, 1-21. Copyright 
by Dodd, Mead and Company. 

212. Immigration in a Single Year. By F. A. Ogg. . . . 395 

From an article in The World's Work, XIV, 8879-8886. 
Copyright. 

D. The Causes oe Immigration. 

213. The General Causes of Immigration. 

By P. F. Hall 396 

Adapted from Immigration, 14-35. Copyright by Henry 
Holt and Company. 



xxxii TABLE OP CONTENTS 

214. The Demand for White Men 398 

Adapted from an editorial in The World's Work, XIV, 
9395-9396. Copyright. 

215. The Slovaks of Hungary. 

By United States Consul Sterne 399 

Adapted from Consular Reports on Emigration and Im- 
migration, House Executive Document No. 157. 

216. The Causes of Emigration from Italy. 

By Eliot Lord 401 

Adapted from The Italian in America, 40-43. Copyright 
by Benjamin F. Buck. 

217. Emigration from Russia. 

By James Davenport Whelpey 402 

Adapted from TJie Problem, of the Immigrant, 2S7-291. 

218. The Old Immigration and the New 403 

Adapted from A Brief Statement of the Conclusions ■ 
and Recommendations of the Immigration Commis- 
sion, 15-16. 

E. Immigration and the; Industrial System. 

219. Our Industrial Debt to Immigrants. 

By Peter Roberts 404 

Adapted from The Nezv Immigration, 49-62. Copyright 
by The Macmillan Company. 

220. Immigration and Industrial Progress. 

By WilHam S. Rossiter 408 

Adapted" from A Common-Sense Viezv of the Immigra- 
tion Problem, in The North American- Reviezv, 
CLXXXVIII, 368-371. Copyright. 

221. Immigration and Wealth Production. 

By John R. Commons 409 

Adapted from Races and Immigrants in America, 119- 
127. Copyright by The Macmillan Company. 

222. Immigration and Crises. 

By Henry Pratt Fairchild. 41 1 

Adapted from Immigration, 347-356. Copyright by The 
Macmillan Company. 

223. The Standard of Living of the New Immigrants. 

By I. A. Hourwich 415 

Adapted from- Immigration and Labor, ig-22. Copyright 
by G. P. Putnam's Sons. 

224. Immigration and Wages. By I. A. Hourwich. . . . 416 
Adapted from Immigration and Labor, 23-26. Copy- 
right by G. P. Putnam's Sons. 



TABLE OF CONTENTS xxxiii 

225. Immigration and Unionism. By W. Jett Lauck. . 418 
Adapted from The Real Significance of Recent Immigra- 
tion, in The North American Review, CXCV, 2008- 
2009. Copyright. 

E. Raciai, Aspe;cts of the Immigration Problem. 

226. The Effects of Emigration on Greece. 

By Henry Pratt Fairchild 420 

Adapted from Greek Tmniigration to the United States, 
220-235. Copyright by Yale University Press. 
22/'. Labor and Chinese Competition. 

By Mary Roberts Coolidge 421 

Adapted from Cliinese Immigration, 387-400. Copyright 
by Henry Holt and Company. 

228. The ItaHans in Boston. By Robert A. Woods .... 422 
Adapted from Americans in Process, 104-146. Copyright 

'by Houg-hton, 'Mifflin and Company. 

G. The Dangers in Unrestricted Immigration. 

229. The Peril from the Immigrant. By H. G. Wells. 424 

Adapted from TJie Future in America, 142-147. Copy- 
right by Harper and Brothers. 

230. The Economic Argument against Immigration. 

By Frank A. Fetter 426 

Adapted from Population or Prosperity, in The Amer- 
ican Economic Reviezv, HI, No. i, Supplement, 13-16. 

231. Resolutions against Immigration 428 

Passed by the Executive Board of the United Garment 
Workers of America, consisting with one exception of 
Russian Jews, after an unsuccessful strike in New 
York, in 1905. 

H. The Further Restriction oe Immigration. 

232. Recommendations of the Immigration Commission 429 

Adapted from A Brief Statement of the Conclusions and 
Recommendations of the Immigration Commission, 
37-40. 

22i^. The Necessity for the Educational Test. 

By P. F. Flail 430 

Adapted from an article in The Annals of the American 
Academy of Political and Social Science, XXIV, 183. 
Copyright. 

234. Pauperism and the Illiteracy Test. 

By Kate H. Claghorn 431 

Adapted from an article in The Annals of the American 
Academy of Political and Social Science, XXIV, 197- 
i. 193. 



xxxiv TABLE OP CONTENTS 

235. A Threat to the American Farmer in Settling Im- 

migrants in Rural Districts. By Robert D, Ward 431 
Adapted from an article in The Popular Science Month- 
ly, LXVI, 173-175. Copyright. 

236. Consular Inspection as a Method of Restriction. 

By Broughton Brandenburg 432 

Adapted from Imported Americans, 297-301. iCopyright 
by Frederick A. Stokes Company. 



IX. 

THE LABOR PROBLEM. 

237. The Sons of ]\Tartha. By Rudyard Kipling 435 

238. The View-Point of the Laborer. 

By Robert F. Hoxie 436 

Adapted from The Trade-Union Point of View, in The 
Journal of Political Economy, XV, 245-256. 

239. Two Declarations of Faith 441 

a) An Economic Creed. 

Resolutions adopted at the Eighth Annual Convention of 
the National Association of Manufacturers, New Or- 
leans, April, 1913. 

b) A Political Creed. 

Resolutions ad'opted at the Eighteentli Amiual Convenifcion 
of the National Association of Manufacturers, Detroit, 
May, 1913. 

B. The Nature oe the Labor Problem. 

240. Fundamental Factors in the Problem. 

By T. S. Adams and H. L. Sumner 443 

Adapted from Labor Problems, 3-6. Copyright by The 
Macmillan Company. 

241. The Historical Basis of Trade Unionism. 

By Sidney and Beatrice Webb 444 

Adapted from The History of Trade Unionism, 21-37. 

242. The Organization of the Ill-Paid Classes. 

By Charles H. Cooley 446 

Adapted from Social Organisation, 284-289. Copyright 
by Charles 'Scribner's Sons. 

C. Machinery and the Laborer. 

243. The Attitude of the Laborer towards Machinery. 448 
Excerpts from various sources. 



TABLE OP CONTENTS xxxv 

244. An Explanation of the Laborer's Attitude. 

By Henry White 449 

Adapted from an article in The Annals of the American 
Academy of Political and Social Science, XX, 323, sq. 

245. The Laborer and the Machine. 

By John Graham Brooks 45° 

Adapted from Social Unrest, 169-222. Copyright by The 
Macmillan Company. 

246. Machinery Increases Employment. By Leone Levi 453 

Work and Pay, 28. 

247. Machinery and the Demand for Labor. 

By J. A. Hobson • 453 

Adapted from The Evolution of Modern Capitalism, 
317-334- 

248. The Influence of Machinery on Labor. 

By Alfred Marshall 456 

Adapted from Principles of Economics, third edition, 
255-266. 

D. The Courts and Factory Legislation. 

249. Working Day for Women Unconstitutional 45^ 

Ritchie vs. People, 155 ///. 98- 

250. Limitation of Working Day for Women Held 

Constitutional 459 

Wenham vs. State, 65 Neb. 324- 
251 The Federal Courts on Laws Regulating Employ- 
ment 460 

Lochner vs. New York, 198 U. S 45; and Muller vs. 
Oregon, 208 U. S. 412. 

E. Labor and the Standard of Living. 

252. Tabular Outline of the Factors that Determine the 

Cost of Living 461 

Report of the Commission on the Cost of Living, Mas- 
sachusetts, 1910, 193-194- 

253. Index Numbers. By Warren S. Thompson 462 

254. A Wage-Earner's Budget. By Louise Boland More 464 
Adapted from Wage-Earners' Budgets, 163-167. Copy- 
right by Henry Holt and Company. 

255. Ways of Living in Anthracite Coal Communities. 

By Peter Roberts 467 

Adapted from Anthracite Coal Communities, 105-111. 
Copyright by The Macmillan Company. 



xxxvi • TABLE OF CONTENTS 

256. A "Fair Living Wage." By Louise B. More 468 

Wage Earners' Budgets, 268-270. Copyright by Henry 
Holt and Company. 

F. Industrial Akbitration. 

257. Arbitration in New Zealand. By Hugh H. Lusk. . 469 

Adapted from Social Welfare in Nezu Zealand, 74-88. 
Copyright by Sturgis and Walton. 

258. Compulsory Arbitration in Theory and Practice. 

]jy James Edward Le Rossignol and WilHam 

Downie Stewart 473 

Adapted from Stale Socialism in New Zealand, 238-247. 
Copyright by Thomas Y. Crowell and Company. 

G. The; Minimum Wage. 

259. The Victorian Minimum Wage and Productive 

Efficiency. By Sidney and Beatrice Webb. . . . 476 
Adapted from Industrial Democracy, xxxix-xli. 

260. The Evasion of the Law in Victoria. 

By The Royal Commissioner from New South 

Wales 477 

Quoted in Reevks, State Experiments in Australia and 
New Zealand, II, 59. 

261. The Effects of a Minimum Wage in the United 

States. By A. N. Holcombe 477 

Adapted from an article in The American Economic 
Review, II, 33-37. Copyright. 

262. Answers to Objections to Wages Boards. 

By Constance Smith 479 

Adapted from The Case for Wages Boards, 75-86. Pub- 
lished by The National Anti-'Sweating League, Lon- 
don. 

263. The Massachusetts Minimum Wage Commission 

Law 482 

Excerpts taken fro^m the law as found in Labor Bulletin, 
No. 92, Labor Legislation in Massachusetts, 58-60. 

264. The Futility of the Minimum Wage. 

By J. Lawrence Laughlin 484 

Adapted from an article in The Atlantic Monthly, CXI I, 
451-453. Copyriig<ht. 

265. Objections to Wage- Settlement by External 

Authority. By S. J. Chapman 486 

Adapted from Work and Wages, II, 260-264. Copyright 
■by Longmans, Green and Company. 



TABLE OP CONTENTS xxxvii 

H. Industrial Insurance;. 

266. The Problem of Social Insurance. 

By William F. Willoughby • • • • • 488 

From an article in The American Labor Legislation 
Review, III, 159-160. 

267. Theory of Negligence in Employers' Liability. 

By Lee K. Frankel and Miles M. Dawson 490 

Adapted from Workingmen's Insurance in Europe, 5-7. 
Copyright by The Russel Sage Foundation.' 

268. The Responsibility. for Industrial Accidents 49^ 

From Compulsory Compensation for Injured Workmen 
by DaniEi, L. Cease, in American Labor Legislation 
Reviezv, I, 42-43. (a) From an Official Bulletin, (b) 
From a Letter of Instructions to Employees. 

269. Impossibility of Fixing Responsibility for Indus- 

trial Accidents. By P. T. Sherman 493 

Adapted from an article in The Annals of the American 
Academy of Political and Social Science, 157-158. 
270 The Employer's Interest in Workman's Compen- 
sation. By Hal H. Smith 494 

Adapted from Workman's Compensation and the Lazu of 
Torts, an address delivered before The University of 
Michigan Law School, May i, I9I3- Unpublished. 

271. The-Necessity for Employers' Liability. 

By Adna F. Weber • • ■ 495 

Adapted from an article published in The Political 
Science Quarterly, XVIII, 256-284. 

272. The Necessity for Insurance against Illness. 

By Henry R. Seager 49^ 

Adapted from Social Insurance, 78-83. Copyright by The 
Macmillan Company. 

273. The British National Insurance Bill. 

By Warren S. Thompson 49^ 

274. Industrial Insurance and Individual Initiative. 

By Lord Robert Cecil 50o 

Adapted from a speech in The House of Commons, De- 
cember 6, 191 1. Parliamentary Debates, Fifth Series, 
XXXII, col. 1475-1477. 

275. An Argument for Old- Age Pensions. 

By Lee Welling Squier 5oi 

Adapted from Old Age Dependency in the United States, 
324-338. Copyright by The Macmillan Company. 

276. Old-Age Insurance in New Zealand. 

By W. P. Reeves 504 

Adapted from State Experiments in Australia and New 
Zealand, 243-281. 



xxxviii T.4BLB OF CONTENTS 

2'/'/. Unemployment Insurance in Belgium. 

By Warren S. Thompson 506 

278. Insurance against Unemployment. 

By William F. Willoughby 509 

Adapted from an article in The Political Science Quar- 
terly, XII, 476-490. Copyright. 

I. Object and Purpose oe Trade Unions. 

279. The Undemocratic Character of Trade Unions. 

By Charles W. Eliot 511 

Adapted from The Future of Trades Unionism and 
Capitalism in a Democracy, 9-29. 'Copyright by Ken- 
yon College. 

280. An Employer's View of Trade Unions. 

By Andrew Carnegie 512 

The Gospel of Wealth and Other Timely Essays, 114-116. 
Copyright by The Century Company. 

281. Purposes of Trade Unionism. By John Mitchell . . 514 
Adapted from Organised Labor, 2-1 1. Copyright by the 

American Book and Bible House. 

J. Trade Unionism and Wages. 

282. Trade Agreements. By John R. Commons 516 

Adapted fro'm an article in The American Review of 

Reviezvs, XXIII, 328-333. Copyright. 

283. Unionism versus Scientific Management. 

By John R. Commons 520 

Adapted from an article in The American Economic Re- 
viezv, I, 463-472. Copyright. 

284. The Economics of the Closed-Shop. 

By Frank T. Stocton 522 

Adapted from The Closed Shop in American Trade- 
Unions, 165-175. Copyright by The Johns Hopkins 
Press. 

285. The Legal Attitude to Trade Unionism 526 

National Protective Association vs. Cummings, 170 A''. F. 
315- 

K. The Strategy and Weapons oe Industrial Confeict. 

286. Definitions of the Weapons. 

By Frank T. Carlton 527 

Adapted from The History and Problems of Organized 
Labor, 157, 167-168, 180-181. Copyright by D. C. Heath 
and Company. 



TABLB OF CONTENTS xxxix 

287. The Function of the Strike in Collective Bargain- 

ing. By John Mitchell 528 

Adapted from Organized Labor, 299-306. Copyright by 
the American Book and Bible House. 

288. The Utility of the Strike. By Frank Julian Warne 529 

Adapted from The Coal-Mine Workers, 154-158. Copy- 
right by Longmans, Green and Company. 

289. How a Strike is Called 530 

Adapted from TJie Report of the Industrial Commission, 
XVII, Iviii-lxiv. 

290. Picketing. By Lindley D. Clark 532 

Adapted from The Law of the Employment of Labor, 
276-282. Copyright by The Macmillan Company. 

291. Ostracism as an Industriar Weapon. 

By Julian Warne 533 

Adapted from The Coal-Mine Workers, 160-165. Copy- 
right by Longmans, Green and Company. 

292. The Effectiveness of the Boycott and the Black- 

list. By Alba M. Edwards 535 

Adapted from The Labor Legislation of Connecticut, 
163-167. Copyright by The American Economic Asso- 
ciation. 

293. The Boycott of the Butterick Company. 

By A. J. Portenar 535 

Organised Labor, 90-92. Copyright by The Macmillan 
Company. 

294. The Union Label 537 

Adapted from The Report of the Industrial Commission, 
XVn, Ixvii-lxix. 

295. A Legal Criticism of the Injunction. 

By Charles Chaflin Allen 538 

Adapted from an address published in 28 American Law 
Review 828. 

L. Industriai, Unionism. 

296. The Attitude of the New Unionism to Trade 

Unions. By Mary K. O'Sullivan 539 

Adapted from an article in The Survey, XXVIII, 72-74- 
Copyright by The Charity Organization Society. 

297. The Standpoint of Syndicalism. By Louis Levine . 540 
Adapted from an article in The Annals of the American 

Academy of Political and Social Science, XLIV, 114- 
1 18. Copyright. 

298. The General Strike. By Arthur D. Lewis 542 

Adapted from Syndicalism and the General Strike, 217- 

226. 



xl TABLE OP CONTENTS 

X. 

COMPREHENSIVE SCHEMES OF SOCIAL REFORM. 

A. The Voice; of Prote;st against Social Arrangements. 

299. A Christian Protest against Private Property. 

By Saint Basil 545 

Quoted in SkElton, Socialism, 5. 

300. The Voice of Protest in the Peasant Revolt. 

By John Ball 545 

Quoted in Wallace, Studies Scientific and Social, II, 
432. 

301. The Non-Democratic Character of Government. 

By Sir Thomas More 545 

Utopia, Casseli's National Library edition, 17. 

302. The Possibilities of Production. 

By Richard Jeffrey 54^ 

Quoted in Wallace, Studies Scientific and Social, II, 
490-491. 

303. A Protest against Land Ownership. 

By J. J. Rousseau 54^ 

Noted in SkElton, Socialism, 8-9. 

304. Social Protest in the Later Eighteenth Century. 

By J. B. McMaster. 547 

7"he History of the People of the United States, II, 180. 
Copyright by D. Appleton and Company. 

305. Labor and Value 54^ 

This appeared in The Poorman's Guardian, in 1831. See 

Dictionary of Political Economy, under Chartism. 

306. Expanding Wants and Social Unrest. 

By a Retired Cape Cod Captain 548 

Quoted in Brooks, Social Unrest, 96-97- Copyright by 
The Macmillan Company. 

307. How the Poor Live in Manchester. 

By Frederick Engels • • • • 54^ 

Adapted from The Condition of the Working Class in 
England in 1S44, 49-53- 

308. Back of the Yards in Packingtown. 

By A. M. Simons 549 

Adapted from Packingtown, 2-19. . 



TABLE OF CONTENTS xli 

R. Some Conse;rvative; Programs of Industrial Reform. 

309. Cooperation. By Henry Fawcett 550 

Adapted from A Manual of Political Economy, eighth 
edition, 277-294. Copyright b}' A'lacmillan and Con:- 
pany. 

310. Profit-Sharing. By Henry R. Seager 552 

Adapted from Introduction to Economics, 510-513. Copy- 

right by Henry Holt and Company. 

311. The Premium Wage-Plan. By F. L. Halsey 555 

Adapted from an article in The Sibley Journal of Me- 
chanical Engineering, VH, 755-780. 

C. The Social Problem of Rent. 

312. Increase in Land Values in the Fifteenth Century. 

By Therold Rogers 557 

Six Centuries of Work and Wages, 287. 

313. Rents in the Sixteenth Century. By Hugh Latimer 557 

314. The Power of Landlords. By Thomas Spence. . . 557 
From a lecture delivered before the Philosophical So- 
ciety of Newcastle in 1775. Quoted in Wallace^ 
Studies Scientific and Social, H, 435. 

315. The Influence of Rents on Trade and Commerce. 

By A. O'Connor 558 

Special Report of the Royal Commission on the Depres- 
sion in Trade and Industry, made in 1885. 

316. Land Speculation in America. 

a) A Land Boom in Iowa. By Alfred Russell Wallace 558 

b) A Land Boom in California. By A. H. Mortimer. 559 

317. Urban Growth and Overcrowding 559 

Quoted from a single tax pamphlet. 

318. The Social Importance of Rent. 

By Alfred Russel Wallace 559 

Adapted from The Social Quagmire and the Way out of 
It, in Studies Scientific and Social, II, 404-405. 

D. The Theory of the Single Tax. 

319. The Social Injustice of Rent. By Henry George . . 560 

Adapted from Progress and Poverty, bk. iv, chs. 2 and 4, 
and bk. v, ch. i, and Tlie Land Question, 62, 

320. The Benefits of Improvement. 

a) By Adolph Wagner 561 

Adapted from Grundlegung der PoUtischen Oekonomic, 
658-659. 

b) By Therold Rogers 562 

Adapted from Political Economy, ch. 12. 



xlii TABLE OF CONTENTS 

^21. The Theoretical Basis of the Single Tax. 

By C. B. Fillebrown 562 

Adapted from The A-B-C of Taxation, 155-163. Copy- 
right by the author. 

322. A Criticism of the Single Tax. 

By Charles J. Bullock 563 

Introduction to the Study of Economics, 454-456. Copy- 
right by Silver, Burdett and Company. 

323. Land Nationalization. By Charles Gide 564 

Principles of Political Economy, 461-463. Copyright by 
D. C. Heath and Company. 

E. Thi; Land Tax in Engi^and. 

324. Duties on Land Values 566 

Excerpts from The Finance Bill, introduced in The 
House ofXommons, April 29, 1909, by David Lloyd- 
George. 

325. The Land Taxes. By David Lloyd George 567 

Adapted from a speech in the House of Commons, April 

29, 1909. 

F. Thp; Socialist's Indictme;nt oi^ Capitalism. 

326. Marx's Theory of the Development of Capitalism. 

By Werner Sombart 5^9 

Adapted from Socialism and the Social Movement, 
sixth edition, 71-86. Copyright by J. M. Dent and 
Company. 

327. The Economic Failure of Capitalism. 

By J. Ramsey Macdonald 572 

The Socialist Movement, 94-99. Copyright by Henry 
Holt and Company. 

G. The; Meaning of Socialism. 

328. The Central Aim of Socialism. By Thomas Kirkup 575 

Adapted from A History of Socialism, 8-12. 

329. The Distinction between Socialism and Commun- 

ism. By M. Tugan-Baranowsky 57^ 

Adapted from Modern Socialism in its Historical Devel- 
ment, 14-18. 

330. Centralized Socialism. By M. Tugan-Baranowsky 578 
Adapted from Modern Socialism in its Historical Devel- 
opment, 111-116. 

H. The Program oe Socialism. 

331. The Program of the Socialistic Workingman's 

Party in Germany 579 

Quoted 'in Kirkup, A History of Socialism, 423-424- 



TJBLB OF CONTENTS xHii 

332. Basis of the Fabian Society 579 

Quoted in Kirkup, A History of Socialism, 427-428. 

333. Platform of the Socialist Party in the United 

States : 580 

Adapted in convention at Indianapolis, M^ay, 1912. 

I. CoivLECTiviSM ve;rsus Individualism. 

334. Socialism and Overpopulation. By W. D. P. Bliss 586 

Adapted from A Handbook of Socialism, 200-202. 

J. SociAijsM AND Industrial Institutions. 

335. Voluntary Associations under Socialism. 

By J. Ramsey Macdonald 587 

Adapted from The Socialist Movement, 187-190. Copy- 
right by Henry Holt and Company. 

336. Property and Industry under Socialism. 

By John Spargo , 588 

Adapted from Applied Socialism, 116-129. Copyright by 
B. W. Huebsch. 

K. Criticisms of Socialism. 

337. The Transition to the Socialist State. 

By O. D. Skelton - 591 

Socialism: A Critical Analysis, 182-184. Copyright by 
Hart, Schaffner and Marx. 

338. Socialism No Remedy for Inequality. 

By N. G. Pierson 593 

Adapted from Principles of Economics, H, 88-91. Copy- 
right by Macmillan and Company. 

339. The Incompatibility between Socialism and De- 

mocracy. By A. Schaffle 595 

Adapted from The Impossibility of Social Democracy, 
65-67. 

340. The Case against Socialism. By William Graham 596 
Adapted from Socialism, New and Old, 162-182. 

341. Two Disadvantages of Socialism. 

By N. G. Pierson 597 

Adapted from Principles of Economics, H, 95-97. Copy- 
right by Maomdllan and Company. 

L. Collectivism versus Individualism. 

342. The Freedom of the Individual. 

By Herbert Spencer 599 

343. A Socialistic View of Competition. 

By W. D. P. Bhss 600 

A Handbook of Socialism, 18-20. 



xliv TABLE OP CONTENTS 

344. What Socialized Efficiency Costs Germany. 

By Samuel P. Orth 601 

Adapted from an article in The World's Work, XXVI, 
315-321. Copyright. 

M. Thi; Future of lNDusTRu\r, Society. 

345. An Ethical Aspect of the New Industrialism. 

By Alvin S. Johnson 605 

Adapted from an address with the above title. 



READINGS IN CURRENT ECONOMIC 
PROBLEMS. 



I. 

THE DEVELOPMENT OF MODERN 
INDUSTRIAL SOCIETY. 

A. IDEALS UNDERLYING MODERN INDUSTRIAL DE- 
VELOPMENT. 

I. The Essential Characteristics of Modern Industrialism. 

BY WALTON H. HAMILTON. 

An understanding of the nature of Modern Industrialism! is es- 
sential to an intelligent grasp of its problems and a rational attempt 
at their solution. Such an understanding comes most easily from 
a study of the process by which modern industrial culture has come 
to be what it is. Like all historical work of value, such a study 
must have a definite goal before it. It must aim to reveal those 
institutions, those intellectual and emotional forces, which have 
given character to the prevailing system, which are responsible for 
its problems, and which condition their solution. For that reason 
it is best to begin the historical account of modern culture with a 
brief statement of its essential characteristics. 

Modern Industrialism is a peculiar culture; it is a thing apart. 
Nothing like it has previously existed. The Chinese system of the 
Far East, clinging tenaciously to the past, has developed a system 
which is a sprawling, conglomerate fact. The nearer Orient, India, 
for instance, has repressed self-assertion, has subordinated the ma- 
terial side of social life, and has produced, as if from a mould, a 
rigidly hard social system. Even the European states of the ancient 
world failed to organize themselves as industrial and social wholes. 
For example, the Greeks showed nowhere their inability at organ- 
ization more clearly than in failing to associate the individual's gain 
from his labor with a service to a larger group. The unity achieved 
by Rome was a mechanical, not an organic, unity. Both alike 
despised manual labor, and, for that reason, failed to lay an ade- 
quate foundation for a permanent industrial system. How distinct 



2 READINGS IN ECONOMIC PROBLEMS 

is Modern Industrialism is revealed by a brief citation of some of 
its peculiar aspects. The list mentioned below is not intended to be 
all comprehensive and the characteristics mutually exclusive. It is 
merely a statement of some of the charactertistics of our system 
which the student of current economic problems should keep clearly 
in mind. 

First, America and Western Europe, Christendom, in fact, con- 
stitutes a single industrial society. Differences in race, language, 
government, and religious creed are almost negligible in comparison 
with what the Western World has in common. Even where these 
differences exist, the basic elements of these institutions are much 
the same. As ideal or actuality universality has long been a char- 
acteristic of the system. The Roman Empire was universal. When 
the earthly society disintegrated, it remained in idea as a universal, 
heavenly kingdom. The Catholic Church, patterned after this 
heavenly society, kept the ideal alive when more substantial unity 
was impossible. Towards the realization of universality society 
tended to be organized in the Catholic Church. And, at last, when 
the spell of Catholicism was broken, political, social, and particularly 
industrial and commercial institutions had tied the Western World 
together into a single industrial culture. 

Second, Western Civilization is an extremely fluid culture. Few 
legal and authoritative restrictions are placed upon one's right to 
choose his own occupation. There are no hard and fast class lines. 
In the thought of the people there are practically none. Freedom 
of movement from place to place is allowed. In all of life's relations 
there is such fluidity that the adaptation of population, natural re- 
sources, and acquired capital to each other and to changed condi- 
tions is not only rapid, but is constantly in process. Briefly, Chris- 
tian teaching, the presence of the opportunities afforded by the 
American continent, and the Industrial Revolution, have all empha- 
sized this characteristic. 

Third, ours is a humanistic and a material culture. A contempt 
for human life and the material means to well-being, a denial "of the 
world, the flesh, and the devil," a desire to escape from "the vain 
pomp and glory of the world," has never been an essential part of 
the attitude of Western peoples towards life. Even monasticism 
came to be based upon the theory that life in this world is worth 
while. This institution became a means through which other-world 
obligations, placed upon man by the peculiar conditions accompany- 
ing the disintegration of Roman society, could be vicariously satis- 
fied by a small part of society, and the greater part could be released 
to live the better life of the world. Men who fervently sing, "For 



DBFBLOPMBNT OF INDUSTRIAL SOCIETY 3 

such a worm as I," and "This world's a wilderness of woe, This 
world is not my home," do not discover new continents, invent print- 
ing and the steam-engine, and erect world-wide industrial systems. 
Unlike Greeks and Romans, with us the idea of the worthwhileness 
of life has carried with it the idea of the dignity of manual toil, 
which has furnished an adequate foundation upon which tO' build 
an industrial culture. 

Fourth, our culture is in a very high degree a pecuniary culture. 
More than by any one thing our economic conduct is actuated by 
the desire for pecuniary profit. We gO' into those occupations prom- 
ising the highest pecuniary returns. Our capital breaks over na- 
tional barriers when the rate of interest abroad mounts higher. 
Even back in the Middle Ages^ penance, a sacrament of the church, 
was put on a pecuniary basis. Escape from; the consequences of 
certain actions was allowed to those who had accumulated wealth. 
Thus the accumulation of wealth and the stratification of society 
upon a pecuniary basis was encouraged. Today in the court, in 
the church, in the press, in social circles, the man of wealth is 
treated with greater consideration because of his wealth. The 
three characteristics mentioned above, fluidity, humanism, and the 
dominance of the pecuniary motive have made our culture a highly 
industrial culture, for it is in industry that these motives find their 
fullest expression. 

Fifth, our culture places the value of human actions and insti- 
tutions in some end or institution over and beyond themselves. The 
justification of individual activity is not to be found in personal 
good. The actions of individuals are found worthy of praise only 
because of a larger and a greater "society,"' towards which they are 
as means to an end. Laissez-faire is defended not as a means to 
self-aggrandizement, but as a theory o-f social welfare. "Big busi- 
ness" talks in terms of "pay envelopes," "full dinner pails," and 
"general prosperity." But the end from which the value comes is 
even less immediate than present society. The justification of the 
present is in the future. Back in the Middle Ages one's conduct 
was regulated by one's desire for his "soul's salvation." As men 
little by little ceased to have souls, and "life's fullness" came more 
and more to be recognized as life's end, the emphasis formerly 
attached to the other world associated itself with an ideal society 
which was striving for realization in the church. Even today, ob- 
scured as it may seem, an ideal future society is the potent force 
in evaluating conduct, individual and social. How potent is this 
idea of the future a few statements will show. We use "round- 
about" processes of production. In legislation we seek to conserve 



4 READINGS IN ECONOMIC PROBLEMS 

the interests of capital, future goods, rather than give our atten- 
tion to conserving immediate income. We speak in terms of pro- 
gress and evolution. We condemn, as never before, industry and 
politics because of its "shortsightedness." We give serious consid- 
eration to such a radical program of industrial reform as socialism. 
The value of the present thing is in large part a value derived from 
a future ideal. Thus a spirit of idealism, seeing a realization of its 
purposes in a less immediate society is a very vital factor in deter- 
mining the course of industrial development. 

These several characteristics, material and emotional as all of 
them are, are vital, because they underlie our culture, condition our 
growth, and must be clearly recognized in any program of political, 
social, and industrial reform. 

2. The Contribution of Christian Teaching to Industrial Devel- 
opment. 

BY WILI^IAM CUNNINGHAM. 

The debt of Christendom to ancient Rome is very deep, and cen- 
turies of gradual growth were required before mediaeval could vie 
with ancient civilization in the external signs of material prosperity ; 
but it would be a mistake to suppose that the new society was a 
mere reproduction of the old ; it differed in every single feature. 
The contrast between the Roman Empire and mediaeval Christendom 
wa^ a difference not in skill or in organization merely, but in the 
whole spirit of the civilization. Though this element is very im- 
portant it is so subtle that analysis does not readily detect it ; but 
the best that the Greeks had attained may be taken as the starting 
point from which the new advance began. The Greek regarded 
material wealth as a means to an end, and as offering opportunities 
for the cultured life of free men in a City-State. A high respect 
for the dignity of man and the possibilities of human nature as 
essentially political, dominated his attitude toward the material 
world, and the pursuit of agriculture, commerce, and industry. 
Christian teaching carried this Greek conception of the supreme 
worth of human life much farther by presenting it in its super- 
natural aspects. The doctrine of the Incarnation asserted that the 
human body had afforded an adequate medium for the manifesta- 
tion of the divine nature; the doctrine of the Resurrection held out 
a sure and certain hope of personal immortality for the human soul. 
Christianity thus involved a very high view of human life. The 
supreme dignity of mian as man was set forth by Christian teaching 
and the conscious and habitual subordination of material things to 



DBVULOPMBNT OF INDUSTRIAL SOCIETY 5 

human ideals and aspirations was carried further than it had ever 
been before. 

One of the gravest defects of the Roman Empire lay in the fact 
that its system left little scope for individual ends, and tended to 
check the energy of capitalists and laborers alike. But Christian 
teaching opened up an unending prospect before the individual per- 
sonally, and encouraged him to diligence and activity by an eternal 
hope. Nor did such a concentration of thought on a life beyond 
the grave divert attention from secular duties. Christianity brought 
out new motives for taking them earnestly. The Christian monk 
was deprived of civil rights, and was absolutely at the beck and call 
of his superior. But there was no degradation in monastic obedi- 
ence, since it was voluntarily undertaken by a freeman as a disci- 
pline through which he might attain the noblest destiny. 

In fact the chief claim oi the monks tO' our gratitude lies in this 
that they helped to diffuse a better appreciation of the duty and 
dignity of labor. By the "religious" manual labor was accepted as 
a discipline which helped them to walk in the way of eternal salva- 
tion; it was not undertaken for the sake of reward, since the pro- 
ceeds were to go for the use of the community or the service of the 
poor; it was not viewed as drudgery that had to be gone through 
from dread of punishment. There was neither greed of gain, nor 
the reluctant service of the slave, but simply a sense of a duty to be 
done diligently untoi the Lord. 

The acceptance of this higher view of the dignity of human life 
as immortal was followed by a fuller recognition of personal respon- 
sibility. Christianity introduced a new sense oi duty in regard to 
the manner of using material things. The wealth of the old world 
had been wasted in the perpetuation of regal pride and the gratifi- 
cation of personal luxury. Provinces had been despoiled and ruined 
and their resources exhausted rather than developed. Christianity 
protested against any employment of wealth that disregarded the 
glory of God and the good of man. 

This then was the characteristic difference between the ancient 
civilization and the new order which was beginning to flourish in the 
twelfth century. These principles, even though imperfectly realized, 
help us to understand the character of modern civilization. A ca- 
pricious and arbitrary ruler had been hailed with divine honors in 
ancient times; in the Middle Ages the supremacy of Eternal and 
Supernatural Authority over all human beings was maintained. The 
Christian doctrine of price, the Christian condemnation of gain at 
the expense of another man, affected all the mediaeval organizations 
of municipal life and regulation of intermunicipal commerce, and 



6 " READINGS IN ECONOMIC PROBLEMS 

introduced marked contrasts to the conditions of business in ancient 
cities. The Christian appreciation of the duty of work rendered 
the lot of the mediaeval villein a very different thing from that of the 
slave in the ancient empire. The responsibility of proprietors was 
so far insisted on as to place substantial checks on tyranny of every 
kind. For these principles were not mere pious opinions, but effec- 
tive maxims in practical life. 



B. THE MANOR, A SELF-SUFFICIENT ECONOMY. 
3. A Short Sketch of the English Manor. 

BY WII^IvIAM J. ASHLE^Y. 

Till nearly the end of the fourteenth century, England was a 
purely agricultural country. Such manufactures as it possessed 
were entirely for consumption within the land; and for goods of 
finer qualities it was dependent upon importation from abroad. 

In the eleventh century, and long afterwards, the whole coun- 
try, outside the larger towns, was divided into manors, in each of 
which one person, called the lord, possessed certain important and 
valuable rights over all the other inhabitants. Let us picture to 
ourselves an eleventh-century manor in Middle or Southern Eng- 
land. There was a village street, and along each side of it the 
houses of the cultivators of the soil, with little yards around them : 
as yet there were no scattered farmhouses, such as were to appear 
later. Stretching away from the village was the arable land, divided 
usually into three great fields, sown, one with wheat, one with oats 
or beans, while one was left fallow. The fields were sub-divided 
into "furlongs ;" and each furlong into acre or half-acre strips, sep- 
arated, not by hedges, but by "balks" or unploughed turf ; and these 
strips were distributed among the cultivators in such a way that 
each man's holding was made up of strips scattered up and down 
the three fields, and no man held two adjoining pieces. Each holder 
was obliged to cultivate his strips in accordance with the rotation 
of crops observed by his neighbors. There were also meadows, 
enclosed for hay-harvest, and divided into portions by lot, or rota- 
tion, or custom, and after harvest thrown open again for the cattle 
to pasture upon. In most cases there was also some perm'anent 
pasture or wood, into which the cattle were turned, either "with- 
out stint," or in numbers proportioned to the extent of each man's 
holding. 



DBVELOPMBNT OF INDUSTRIAL SOCIETY 7 

The land was regarded as the property, not of the cultivators, 
but of a lord. It was divided into that part cultivated for the imme- 
diate benefit of the lord, the demesne or inland, and that held of 
him by tenants, the land in villenage, the latter being usually about 
two-thirds of the whole. The demesne consisted partly of separate 
closes, partly of acres scattered among those of the tenants in the 
common fields. Of the land held in villenage, the greater part was 
held in whole or half virgates. The virgate was a holding made up 
of scattered acre or half-acre strips in the three fields, with propor- 
tionate rights to meadow and pasture ; and its extent, varying from 
sixteen to forty-eight acres, was usually thirty acres. The holders 
of such virgates formed an estate socially equal among themselves, 
and all of them were under the same obligations of service to the 
lord. 

The principal services which the lord exacted of the villein were, 
first, a man's labor for two or three days a week throughout the 
year, known as week work, or daily works, and second, additional 
labor for a few days at spring and autumn ploughing and at har- 
vest. On such occasions the lord demanded the labor of the whole 
family, with the exception of the housewife. Besides these, there 
were usually small quarterly payments to be made in money, and 
•miscellaneous dues in kind, so many hens and eggs, and so many 
bushels of oats at dififerent seasons ; as well as miscellaneous ser- 
vices, of which the most important is carting. During the boondays 
it was usual for the lord to feed the laborers/ 

The fundamental characteristic of the manorial group, regarded 
from the economic point of view, was its self sufficiency, its social 
independence. The same families tilled the village fields from father 
to son. Each manor had its own law courts for the maintenance of 
order. Then as now, every village had its own church ; with this 
advantage or disadvantage, that the priest did not belong to a 
different social class from his parishioners. The village included 
men who carried on all the occupations and crafts necessary for 
■every^-day life. There was always a water or wind-mill which the 
tenants were bound to use, paying dues which formed a considerable 
part of the lord's income. Many villages had their own blacksmith 
and carpenter, probably holding land on condition of repairing the 
ploughs of the demesne and the villagers. 

Thus the inhabitants of an average English village went on, 
year in, year out, with the same customary methods of cultivation, 
living on what they produced, and scarcely coming in contact with 
the outside world. The very existence of towns, indeed, implied 
that the purely agricultural districts produced more than was re- 



8 READINGS IN ECONOMIC PROBLEMS 

quired for their own consumiption; and corn and cattle were regu- 
larly sent, even to distant markets. But the other dealings of the 
villages with the outside world were few. First, there was the pur- 
chase of salt, an absolute necessity in the mediaeval world, where 
people lived on salted meat for five months in the year. Second, 
iron was continually needed for the ploughs and other farmi imple- 
ments. Third, when a fresh disease, the scab, appeared among the 
sheep, tar became of great importance as a remedy. Perhaps the 
only other recurring need, which the village could not itself supply, 
was that of millstones. 

Such were the chief characteristics of the manorial group as a 
whole, self-sufficiency and corporate unity. Now let us look at the 
position of the individual members in the group. Some had risen 
to the position of free tenants, but the great majority had continued 
to hold by servile tenure. Of the position of this great majority 
the characteristic was permanence, with its disadvantages and also 
with its advantages. 

It is instructive to compare the village as we have seen it with 
the village of today. In one respect there might seem to be a close 
resemblance. Then, as usually now, the village was made up of one 
street, with a row of houses on either side. But the inhabitants of 
the village street now are the laborers and artisans wdth one or 
more small shop-keepers. The farmers live in separate homesteads 
among the fields they rent, and not in the village street. Then all 
the cultivators of the soil lived side by side. Second, notice the 
difference as to the agricultural operations themselves. Now each 
farmer follows his own judgment in what he does. But the peas- 
ant-farmer of the period we have been considering was bound to 
take his share in a common-system of cultivation, in which the time 
at which everything should be done and the way in which everything 
should be done was regulated by custom. A further difference is 
seen in the relations of lord and tenant as to- the cultivation. Now- 
adays either the landlord does not himself farm^ any land in the 
parish, or his management of it is independent of the cultivation of 
any other land by tenants. But then almost all the labor on the 
demesne was furnished by the villein tenants, who contributed 
ploughs, oxen, and men. Compare finally the classes in the manor, 
with those in the village today. In a modern parish there will 
usually be a squire, some three or four farmers, and beneath them 
a comparatively large number of agricultural laborers. But in the 
mediaeval manor, much the greater part of the land was cultivated 
by small holders. Between the lord of the manor and the villein 
tenants there \vas, indeed, a great gulf fixed. But there was noth- 



DUVBLOPMUNT OP INDUSTRIAL SOCIETY 9 

ing like the social separation of classes of actual cultivators that 
exists today. 

It may be well to note the non-existence in the village group of 
certain elements which modern abstract economics is apt tO' take 
for granted. Individual liberty, in the sense in which we understand 
it, did not exist; consequently there could be no complete competi- 
tion. The payments made by the villeins were not rents in the ab- 
stract economist's sense: for the economist assumes competition. 
The chief thought of lord and tenant was, not what the tenant could 
possibly afford, but what was customary. And, finally, there was 
as yet no- capital in the modern sense. O'f course there was capital 
in the sense in which the word is defined by economists, "wealth ap- 
propriated to reproductive employment," for the villeins had 
ploughs, harrows, oxen, horses. But this is one of the most un- 
real of economic definitions. As has been well said, by capital we 
mean more than this ; we mean a store of wealth that can be directed 
into new and more profitable channels as occasion arises. In that 
sense the villeins certainly had no capital. 

4. The Economic Independence of the Manor. 

BY J. DORSE^Y FORRE^ST. 

The economic independence of minute communities was brought 
about by several causes, most of which have usually been over- 
looked. First, we may note the violence that rendered commercial 
intercourse impossible. The main cause of the interruption of com- 
mercial routes by land was the inability oi the barbarians tO' organize 
a government. They were actuated by no desire tO' destroy com- 
merce. In view of the disorder of the times, the community that 
could not maintain itself perished. Each domanial community was 
shut in by itself. No' help could be expected from outside sources. 
Famines and epidemics became common. Money ceased tO' circu- 
late. All that could be hoped for was a sufficiency of the simplest 
necessities of life. 

A second important cause of the isolation oi the domains was a 
lowering of the standard of living brought about by the invasions. 
The barbarians themselves desired little more than the necessities 
of life. Their desire for goods that had constituted the bulk of 
commerce was not strong eno'Ugh to encourage manufactures in 
any way. The destruction of the industries withdrew manufactured 
goods from circulation, and, consequently, left little occasion for 
the circulation of agricultural products. 



lo READINGS IN ECONOMIC PROBLEMS 

The lack of any surplus of agricultural products for exchange 
constituted a third cause of the isolation of the manor. The disor- 
ganization of the domains must have been very great. Before the 
settlements were completed much raiding took place, causing the 
destruction of property and laborers. The changes which cut off 
importations of food made it necessary to raise crops for which 
given domains were not best suited. This decreased the productiv- 
ity oi many domains ; and, in turn, as more diversified but smaller 
crops were secured, still less was left for possible exchange. In 
places the inability of the newcomers tO' keep the workers up tO' their 
best caused a serious decrease in the productivity of the domains. 
Further, the constant wars carried on by unruly lords caused the 
destruction of many a crop and the discouragement of the culti- 
vators. The food question soon became all-important to barbarian 
society ; and the feudal system finds its chief explanation in the fact 
that every locality had to develop its own food supply. Until a 
-surplus of agricultural products could be assured there was no 
possibility of a revival of commerce arid the reestablishment of an 
economic interdependence that would bind distant localities together 
into one community. Since conditions were everywhere the same, 
the agricultural system adopted was everywhere the same. Europe 
was everywhere organized on the manorial plan, and had to main- 
tain that organization in order to exist at all. 



C. SELECTED GILD DOCUMENTS. 

5. Ordinances of the Gild Merchant of Southampton. 

1. In the first place, there shall be elected from the Gild Mer- 
chant, and established, an alderman, a steward, a chaplain, four 
skevins, and an usher. And it is to be known that whosoever shall 
be alderman shall receive from each one entering into the Gild four- 
pence; the steward, twopence; the chaplain, twopence; and the 
usher, one penny. And the Gild shall meet twice a year: that is to 
say, on the Sunday next after St. John the Baptist's day, and on 
the Sunday next after St. Mary's day. 

2. And when the Gild shall be sitting no one of the Gild is 
to bring in any stranger, except when required by the alderman or 
steward. 

3. And when the Gild shall sit, the alderman is to have, each 
night, so long as the Gild sits, two gallons of wine and two candles, 



DBVBLOPMBNT OF INDUSTRIAL SOCIETY 



II 



■and the steward the same; and the four skevins and the chaplain, 
each of them one gallon of wine and one candle, and the usher one 
gallon of wine. 

4. And when the Gild shall sit, the lepers of La Madeleine 
shall have of the alms of the Gild, two sesters of ale, and the sick 
of God's House and of St. Julian shall have two sesters of ale. And 
the Friar's Minors shall have two sesters of ale and one sester of 
wine. And four sesters of ale shall be given to the poor wherever 
the Gild shall meet. 

5. And when the Gild is sitting, no one who is of the Gild 
shall go outside of the town for any business, without the permis- 
sion of the steward. And if any one does so', let him be fined two 
shillings, and pay them. 

6. And when the Gild sits, and any gildsmian is outside of the 
city so that he does not know when it will happen, he shall have 
a gallon oi wine, if his servants come tO' get it. 

9. And when a gildsman dies, his eldest son or his next heir 
shall have the seat of his father, or of his uncle, if his father was 
not a gildsman, and of no other one; and he shall give nothing for 
his seat. No husband can have a seat in the Gild by right of his 
wife, nor demand a seat by right of his wife's ancestors. 

10. And no one has the right or power to sell or give his seat 
in the Gild to any man. 

19. And no one in the city of Southampton shall buy anything 
to sell again in the same city, unless he is of the Gild Merchant or 
of the franchise. And if anyone shall do so and is convicted of it, 
all which he has so bought shall be forfeited to the king : 

20. And no one shall buy honey, fat, salt herrings, or any kind 
of oil, or millstones, or fresh hides, or any kind of fresh skins, un- 
less he is a gildsman ; nor keep a tavern for wine, nor sell cloth at 
retail, except in market or fair days ; nor keep grain in his granary 
beyond five quarters, to sell at retail, if he is not a gildsman ; and 
whoever shall do this and be convicted shall forfeit all to the king. 

21. No one of the Gild ought to be partner or joint dealer in 
any of the kinds of merchandise before mentioned with anyone 
who is not of the Gild, by any manner of coverture, or art, or con- 
trivance, or collusion, or in any other manner. 

23. And no private man nor stranger shall bargain for or buy 
any kind of merchandise coming into the city before a burgess of 
the Gild Merchant, so long as the gildsman is present and wishes to 
bargain for and buy this merchandise. 

24. And anyone who is of the Gild Merchant shall share in all 



12 



READINGS IN ECONOMIC PROBLEMS 



merchandise which another gildsman shall buy or any other person, 
whoever he is, if he comes and demands part and is there where the 
merchandise is bought, and also if he gives satisfaction to the seller 
and gives security for his part. 

63. No one shall go out to meet a ship bringing wine or other 
merchandise coming to the town, in order to buy anything, before 
the ship be arrived and come to anchor for unloading; and if any 
one does so and is convicted, the merchandise which he shall have 
bought shall be forfeited to the king. 

6. Articles of the Spurriers of London. 

In the first place, — that no one of the trade of Spurriers shall 
work longer than from the beginning of day until curfew rung out 
at the Church of St. Sepulchre, without Newgate ; by reason that no 
man can work so neatly by night as by day. And many persons of 
the said trade, who compass how to practice deception in their 
work, desire to work by night rather than by day; and then they 
introduce false iron, and iron that has been cracked, for tin; and 
also they put gilt on false copper, and cracked. And further,^ 
many of the said trade are wandering about all day, without work- 
ing at all at their trade; and then when they have become drunk 
and frantic, they take to their work, to the annoyance of the sick, 
and all their neighborhood, as well by reason of the broils that arise 
between them and the strange folks who are dwelling among them. 
And then they blow up their fires so vigorously, that their forges 
begin all at once to blaze to the great peril of themselves and of all 
the neighborhood around. And then, too, all the neighbors are 
much in dread of the sparks, which so vigorously issue forth in all 
directions from the mouths of the chimmeys in their forges. By 
reason thereof it seems unto them that working by night should be 
put an end to, in order such false work and such perils to avoid: 
and, therefore, the Mayor and the Aldermen do will, by the assent, 
of the good folks of the said trade, and for the common profit, that 
from henceforth such time for working, and such false work made 
in the trade, shall be forbidden. 

Also, that no alien of another country, or foreigner of this 
country, shall follow or use the said trade, unless he is enfranchised 
before the Mayor, Alderman, and Chamberlain. Also, that no one 
of the said trade shall work on Saturdays, after None has been rung 
out in the City ; and not from that hour until the Monday morning 
following. 



DUVELOPMBNT OF INDUSTRIAL SOCIETY 13 

7. Ordinances of the White-Tawyers. 

In honour of God, of Our Lady, and oi All Saints, and for the 
nurture of tranquility and peace among the good folks the Megu- 
cers, called white-tawyers, the folks of the same trade have, by as- 
sent of Richard Lacer, Mayor, and of the Aldermen, ordained the 
points under-written. 

In the first place, they have ordained that they will find a wax 
candle, to burn before Our Lady in the Church of Allhallows, near 
London wall. 

And if any one of the said trade shall depart this life, and have 
not wherewithal to be buried, he shall be buried at the expense of 
their common box. And when any one of the said trade shall die, 
all those of the said trade shall go to the vigil, and make offering 
on the morrow. 

Also, that no one of the said trade shall induce the servant of 
another to work with him in the said trade, until he has made a 
proper fine with his first master, at the discretion of the said over- 
seers, or of four reputable men of the said trade. And if anyone 
shall do to the contrary thereof, or receive the serving workman of 
another to work with him during his term, without leave of the trade, 
he is to incur the said penalty. Also, that no one shall take for 
working in the said trade more than they were wont heretofore. 

8. Preamble to the Ordinances of the Gild of the Tailors, Exeter. 

To the worship of God and of our Lady Saint Mary, and of St. 
John the Baptist, and of all Saints : These be the Ordinances made 
and established of the fraternity of craft of tailors, of the city of 
Exeter, by assent and consent of the fraternity of the craft afore- 
said gathered there together, for evermore to endure. 

D. THE POLICY OF THE TOWN. 
g. The Spirit of Solidarity in the Mediaeval Town. 

BY WAI^TON H. HAMILTON. 

The town and gild ordinances, of which the selections given 
above are typical, furnish abundant evidence of a spirit of social 
solidarity animating industrial legislation which is quite foreign to 
the modern point of view. There was a determined attempt on the 
part of the authorities to prevent "regrating," or buying to sell 
again at a higher price ; "forestalling," ot outwitting fellow dealers 
by purchasing goods before they came into open market; and "en- 



14 



READINGS IN ECONOMIC PROBLEMS 



grossing," or the modern cornering-the-market. Gild documents 
are replete with statutes the purpose of which was to secure to the 
consumer the use of the best raw materials, the exercise of care and 
skill on the part of the workman, and full measure. While instances 
could be multiplied, the custom in the city of Chester that "a man 
or woman making false measure and being arrested, comipounded 
for it with four shillings ;" the custom in the same town of punish- 
ing with the ducking stool the maker of bad ale; and the statute of 
the spurriers of London to the effect that "no one of the trade of 
spurriers shall work longer than from the beginning of the day until 
curfew rings out of the church of St. Sepulcher," are typical exam- 
ples of legislation of this kind. But perhaps, to the modem mind, 
the strangest of all the customs was the levying of export duties and 
the frequent prohibition O'f the export of certain articles^ usually 
food-stuffs. The purpose of such taxes and prohibitions is implicit 
in the frequently appended clause, "because of the scarcity of the 
commodity in the city of late." A careful examination of the evi- 
dence shows that it was framed in the interest of producers-consum- 
ers by men who were not sufficiently used to the intermediate money 
term to separate the two parts of the economic process. 

An explanation of the attitude implicit in this legislation is sim- 
ple when the conditions of life in the mediaeval town are kept clearly 
in mind. These laws were enacted, not because men of the Middle 
Ages were less acquisitive than modern men, or were more imibued 
with the spirit of Christianity, but because oi the peculiar exigen- 
cies of Mediaeval town life. The Mediaeval town, settled by alien 
merchants, villeins from near-by manors, emancipated or runaway 
serfs, and fortune seekers from far and near, began its career with 
no sharply drawn class lines and few local traditions. It was the 
product of a new industrial movement which threatened to rob the 
First and Second Estates of the social and economic preeminence 
which they had enjoyed for centuries. The nature and aspirations 
of town life were incompatible with the customs O'f feudalism. 
There was an inevitable opposition between the larger industrial 
entity which bourg'oisie life made necessary and the smaller unit in 
which alone the spirit of feudalism could survive. There developed 
consequently a hostility between the old and the new, and it became 
necessary to fight for existence. From such a common struggle a 
spirit of solidarity necessarily emerged. 

An influence even stronger was the economic dependence of the 
town. It will not be denied, I think, that where the conditions of 
existence are severe, a strong feeling of common interests grows 
up within the group. Such conditions existed in the mediaeval town. 



DBVBLOPMBNT OF INDUSTRIAL SOCIETY 15 

It must be admitted that the transition from the Roman system of 
slavery to the mediaeval system of serfdom represented a great eco- 
nomic gain. The serf, freed fronii gang work and thrown on his 
own resources, with rents fixed by immutable custom, and with the 
assurance of a right to enjoy all the surplus produced above the stip- 
ulated rent, held a position that gave promise of efficiency. He was 
in position to produce an agricultural surplus, a necessary antece- 
dent to the development of the town. But the real gain in the transi- 
tion from slavery to serfdom was potential and not actual. It is 
very doubtful whether the serf of the twelfth century was produc- 
ing as much as the slave in the palmy days of the Empire. To make 
this potential surplus actual, the wants O'f the agricultural laborer 
had to be developed. Despite the principle of the indefinite expansi- 
bility of wants, this process was slow, depending upon the chance 
visits of travelling merchants, the fairs, and the slow development 
of the towns. Consequently the precariousness of its food supply 
made the threat of starvation a very real one to the town. The 
result was necessarily legislation which sought to conserve the food 
supply. 

It is true that differentiation of occupations characterized the 
town almost from the very beginning. Even in the days of the 
early gild merchant individual interests were not completely iden- 
tical with communal interests. But the technical methods of the 
gildsman were simple and direct, necessitating the use of very little 
capital, and causing industry tO' be carried on on a small scale.- The 
relationship of the master workman to the members of his estab- 
lishment was personal. Generally speaking goods were made to 
order. The artisan knew the eccentricities of his customers, and was 
anxious to humor them. The industrial process was a short-time 
one, goods were generally consumed in the neighborhood in which 
they were produced, and if any flaw in material or defect in work- 
manship was discovered, the producer would likely hear of it. 
Under such conditions the social ownership of productive goods 
only gradually gave way to the ever-enlarging" area of indi- 
vidual property-rights. Hence the two processes O'f produc- 
tion and consumption were practically identified in the mind 
of the townsman. This breadth of view-point in domestic 
relations can best be understood by its contrast with the townsmian's 
conduct of foreign or out-of-town trade. The current code of busi- 
ness ethics allowed inferior materials and poor workmanship to be 
used in the production of articles for the foreign market. The in- 
terests of the foreigner were not protected by the customary, or 
just, price; and if, by hook or crook, the townsman could put ofif 



1 6 READINGS IN ECONOMIC PROBLEMS 

short weight on the foreigner, so much the better. In short, here 
the element of personality was minimized ; and, for that reason, 
production, the social means, became to the artisan an individual end. 
In this attitude toward foreign trade is to be found the beginning 
O'f the entrepreneur view-point. As the industrial entity increased 
in size and complexity, as the time of the productive process was 
lengthened, and as business relations became more impersonal, it is 
quite natural that the gildsman's attitude towards foreigners should 
come to be his attitude towards all customers. 

Yet the influence of mediaeval thought in promoting the spirit of 
solidarity is not to be wholly overlooked. The town was born in an 
atmosphere saturated with the spirit of Mediaeval Catholicismv 
Brotherhood and equality had long been preached by the Church. 
Vertical, or inter-class equality was never realized, either in Chiv- 
alry or in the Church. But many mediaeval institutions presented at 
least a fair semblance of horizontal, or intra-class equality. It was 
under the influence of ecclesiastical precedents that the towns es- 
tablished their new organizations. A study of the characteristic 
features O'f the gilds shows how great was the number of things for 
which they were indebted to religious institutions, and how few 
were the real innovations springing out of the newly created urban 
life. Influenced by such habits of thought and freed from the ob- 
stacles opposed by an already stratified society, the merchant gild 
legislated with the end in view of placing social interests above class. 
or individual interests. Intellectual conditions and the pressure of 
economic and political necessity prevented the formal sacrifice of 
social weal to individual acquisition. 

E. THE DEVELOPMENT OF COMMERCE. 
10. A Definition of Commerce. 

BY J. DORSEY FORREST. 

Attempts to study the development of commerce have usually 
been unsatisfactory because they have failed to distinguish between 
real commercial activity and the mere external mechanism of ships 
and roads and travelers. The real history of commerce which will 
sometime be written will give some account of the production which 
has fed commerce, as well as a description of the routes, and of 
some actual exchanges which indicate that commerce had actually 
been going on. Such phenomena of the mechanism of trade are 
worthy of note, but only as guiding the student to a deeper study 
of the dynamical phenomena of which these are but surface indica- 



DEVELOPMENT OF INDUSTRIAL SOCIETY 



17 



tions. Real commerce represents a differentiation of function by 
which the diverse parts of society come intO' complex and organic 
relations with one another. 

II. The Attitude of the Mediaeval Church toward Commerce. 

BY WII^UAM J. ASHI^EY. 

The teaching of the Gospel as to M^orldly goods had been un- 
mistakable. It had repeatedly warned men against the pursuit of 
wealth, which would alienate them from the service of God and 
■choke the good seed. It had in one striking instance associated 
spiritual perfection with the selling of all that a man had that he 
might give it to the poor. It had declared the poor and hungry 
blessed, and had prophesied woes to the rich. Instead of anxious 
thought for the food and raiment of the morrow, it had taught trust 
in God ; instead of selfish appropriation of whatever a man could 
obtain, a charity which gave freely to all who asked. And in the 
members of the earliest Christian Church it presented an example 
of men who gave up their individual possessions, and had all things 
in common. 

We cannot wonder that, with such lessons before them, a salu- 
tary reaction from the self-seeking of the pagan world should have 
led the early Christian Fathers totally to^ condemn the pursuit of 
gain. It took them further — tO' the denial to the individual of the 
right to do Avhat he liked with his own, even to enjoy in luxury the 
wealth he possessed. "What injustice is there in my diligently 
preserving my own, so long as I do not invade the property of an- 
other?" "Shameless saying!" says S. Ambrose. "My own, sayest 
thou? what is it? from what secret places hast thou brought it into 
this world? When thou enterest into the light, when thou camest 
from thy mother's womb, what wealth didst thou bring with thee? 
That which is taken by thee, beyond what would suffice to thee, is 
taken by violence. Is it that God is unjust, in not distributing to 
us the means of life equally, so that thou shouldst have abundance 
while others are in want? It is the bread of the hungry thou keep- 
est, it is the clothing of the naked thou lockest up ; the money thou 
buriest is the redemiption of the wretched." To seek to enrich one's 
self was not, simply, to incur spiritual risk tO' one's own soul ; it was 
in itself unjust, since it aimed at appropriating an unfair share of 
what God had intended for the common use of men. If a man pos- 
sessed more than he needed, he was bound tO' give his superfluity to 
the poor ; for by natural law he had no personal right to it ; he was 
only a steward for God. 



1 8 . READINGS IN ECONOMIC PROBLEMS 

If, however, to seek to enrich one's self was sinful, was trade 
itself justifiable? This was a question which troubled many con- 
sciences during the Middle Ages. On the one hand the benefits 
which trade conferred on society could not be altogether overlooked, 
nor the fact that with many traders the object was only to obtain 
what sufificed for their OAvn maintenance. On the other hand they 
saw that trade was usually carried on by men who had enough al- 
ready, and whose chief object was their own gain : "If covetousness 
is removed," urges Tertullian, "there is no reason for gain, and, if 
there is no reason for gain, there is no need of trade." Moreover, 
as the trader did not seem himself to add to the value of his wares, 
if he gained more for them than he had paid, his gain, said S. 
Jerome, must be another's loss ; and, in any case, trade was danger- 
ous to the soul, since it was scarcely possible for a merchant not 
sometimes to act deceitfully. To^ all these reasons was added yet 
another. The thoug'ht of the supreme importance of saving the in- 
dividual soul, and of communion with God, drove thousands into 
the hermit life of the wilderness, or into monasteries ; and it led 
even such a man as Augustine to^ say that "business" was in itself 
an evil, for "it turns men from seeking true rest, which is God." 

In the eleventh century began a great moving of the stagnant 
waters. The growth of towns, the formation of merchant bodies, 
the establishment of miarkets, — even if they did no more than fur- 
nish the peasant and the lord of the manor with a market for their 
surplus produce, — ^brought men face to face with one another as 
buyer and seller in a way they had not been before. Hence economic 
questions, especially such as concerned the relations of seller and 
buyer, of creditor and debtor, became of the first importance. To 
deal with these new questions a new jurisprudence presented itself, 
— the jurisprudence based on the revived study of Roman law. The 
Roman law, in the finished form in which the codification of Jus- 
tinian presented it, rested on a theory of absolute individual prop- 
erty which was entirely alien to the usages of early Teutonic peo- 
ples, among whom community of ownership, or at any rate com- 
munity in use, was still a prevalent custom; and it recognized an 
imlimited freedom of contract, which may have been suitable to the 
active commerce of the Mediterranean, but was sure to be the in- 
strument of injustice when appealed to in the midst of more primi- 
tive social conditions. 

With these new dangers before them, churchmen began once 
more to turn their attention to economic matters, and to meet what 
they regarded as the evil tendencies of the Roman law, "the prin- 
ciple of the world," by a fresh application of Christian principles. 



DBVBLOPMENT OF INDUSTRIAL SOCIETY 19 

On two doctrines especially did they insist, — that wares should be 
sold at a just price, and that the taking- of interest was sinful. They 
enforced them from the pulpit, in the confessional, in the ecclesias- 
tical courts; and we shall find that by the time that the period be- 
gins of legislative activity on the part of the secular power, these 
two rules had been so impressed on the consciences of men that 
Parliament, municipality, and gild endeavoured of their own mo- 
tion to secure obedience to them. 

12. The Contribution of the Church to Commercial Develop- 
ment. 

BY J. DORSE^Y FORREST. 

A necessary prerequisite of commercial development was the 
establishment of an efficient agricultural system. In perfecting the 
agricultural organization the ecclesiastical domains served as models 
to the smaller lay proprietors. The monasteries depended more on 
rational organization than on personal power, and kept alive the 
more efficient methods employed by the Romans in earlier days. 
The monasteries usually established themselves on waste lands, fo'r 
the prime object of the monks was retirement. After the invasions 
they had no difficulty in finding waste lands even in regions which 
had been most highly cultivated. Great saints could live holy lives 
as hermits ; but when masses of men were gathered together, it 
became necessary for the leaders to lay down rules for practical 
activity. The poverty from which many of the monks came, the 
reverence of the Church for the Son oi the Carpenter, and the ne- 
cessity of labor for a means of subsistence, all co'mbined to give 
manual labor a high moral value in the monasteries. Accordingly 
monastic rules enjoined the duty oi manual labor as a moral disci- 
pline. 

A second prerequisite of commerce was the division of labor and 
the development of the crafts. In time neighbo'ring lords would 
give vast domains, with their villeins, tO' the monasteries in return 
for prayers. As the monasteries thus grew wealthy, a revolution 
came in the management of their internal affairs. All had to find 
a way to divide labor and to^ make some members of the community 
mere laborers. In feudal times this division was well advanced. 
For centuries the nnonks had kept alive many crafts, and the causes 
just referred to advanced these both in number and in technique. 

In spite of the disorder which had troubled Europe from the 
time of the first invasion, there was never a time when commiercial 
intercourse was entirely wanting. During the period of most com- 



20 READINGS IN ECONOMIC PROBLEMS 

plete disorganization the Jews carried on a casual trade in oriental 
luxuries and handled about all the money that circulated. United 
by faith and common traditions, in constant touch with co-religion- 
ists in other countries, they formed an organic body in the midst 
of universal dissolution. The very action of the church upon the 
lay society contributed to their prosperity. The canons of the 
councils in denying to Christians the right to exact usury assured 
to the Jews a monopoly of the money business. Through their inti- 
mate relations with the Mohammedans, they were able to communi- 
cate with the East at a time when no Christian could sail upon the 
Mediterranean. The Church condoned their offenses against Chris- 
tian morality because their services as money-lenders and dealers in 
valuables were indispensable. They were found also dispersed 
throughout the country, and on the domains plied their trade as 
pawnbrokers among the villages and brokers for the lords. Though 
the business of the Jews had some importance as a stimulus to 
greater demands for luxuries, it can hardly be considered a part oi 
the commerce of Europe. Such commodities as spices, perfumes, 
silks, tapestries, precio'US stones, and jewelry were of little import- 
ance in the social development of Europe. 

Preparation for the revival of . commerce was made by the 
Church. The importance of magic made it desirable to transport 
sacred relics from place to place; and the need of pictorial services 
required the transportation of church furnishings from Byzantium 
and Italy to the less advanced communities. For the manufacture 
of glass and the erection of the earlier buildings artisans themselves 
had to be imported from the East and the South. There was also 
a constant intercommunication in certain sections through pilgrim- 
ages to noted shrines. When special festivals were held at these 
shrines, large numbers of pilgrims would be present at the same 
time. The provisioning of such a company would occasion consid- 
erable trade, and peddlars and traders would naturally join the 
pilgrims. Sometimes the monks were themselves traders. Some- 
times men would bring their simple manufactures from domains 
in the neighborhood. In some instances the important fairs sprang 
up at these favorite shrines. But, aside from trade, the pilgrimages 
themselves kept up communication between different points. Again 
the superstitious awe in which the Church was held made it possi- 
ble for priests and monks and messengers and pilgrims to travel 
from place to place as neither merchants nor soldiers could do. Thus 
the commerce of the Church and the travel inspired by the Church 
served to keep open routes which were cloised to ordinary travelers, 
and to bring- remote regions into communication with each other. 



DBVBLOPMBNT OP INDUSTRIAL SOCIETY 21 

The episcopal cities were also centres of incipient commercial 
transactions. Since the bishop did not move from one domain to 
another to consume the products of each in turn, as the lay nobles 
did, the products of surroundings manors had to be transported to 
the residence oi the bishop. Thus there was maintained a kind of 
industrial concentration that might' form the basis for new citv life. 
In these various ways the churches and monasteries contributed 
largely to the commercial development. But they simply prepared 
society for a revival of commercial activity by keeping up com- 
munication and furnishing inns for travelers. 

13. Italian Commerce and Industry in the Fourteenth Century. 

BY THOMAS B. MACAULAY. 

Liberty, partially indeed and transciently, revisited Italy ; and with 
liberty came comimerce and empire, science and taste, all the com- 
forts and all the ornaments of life. The Crusades, from which the 
inhabitants of other countries gained nothing but relics and wounds, 
brought to the rising commonwealths of the Adriatic and Tyrrhene 
seas a large increase of wealth, dominion, and knowledge. The 
moral and geographical position of these commonwealths enabled 
them to profit alike by the barbarism of the West and the civiliza- 
tion of the East. Italian ships covered every sea., Italian factories 
rose on every shore. The tables of Italian moneychangers were 
set in every city. Manufactures flourished. Banks were established. 
The operations of the commercial machine were facilitated by many 
useful and beautiful inventions. We doubt whether any country 
of Europe, our own excepted, has at the present time reached sO' 
high a point of wealth and civilization as so'me parts of Italy had 
attained four hundred years agoi Historians rarely descend to those 
details from which alone the real state of a community can be col- 
lected. Hence posterity is too often deceived by the vague hyper- 
boles of poets and rhetoricians, who' mistake the splendour of a 
court for the happiness of a peoplei Fortunately John Villani has 
given us an ample and precise account of the state O'f Florence in 
the early part of the fourteenth century. The revenue of the Re- 
public amounted to three hundred thousand florins ; a sum which, 
allowing for the depreciation of the precious metals, was at least 
equivalent to six hundred thousand pounds sterling; a larger sum 
than England and Ireland, two centuries ago, yielded annually to 
Elizabeth. The manufacture of wool alone employed two hundred 
factories and thirty thousand workmen. The cloth annually pro- 
duced sold, at an average, for twelve hundred thousand florins ; a 



22 READINGS IN ECONOMIC PROBLEMS 

sum fully equal in exchang-eable value to two millions and a half 
of our money. Four hundred thousand florins were annually coined. 
Eighty banks conducted the commercial operations, not of Florence 
only but of all Europe. The transactions of these establishments 
were sometimes of a magnitude which may surprise even the con- 
temporaries of the Barings and the Rothchilds. Two houses ad- 
vanced to Edward the Third of England upwards of three hundred 
thousand marks, at a time when the mark contained more silver than 
fifty shillings of the present day, and when the value of silver was 
more than quadruple of what it now is. The city and its environs 
contained a hundred and seventy thousand inhabitants. 



F. MEDIAEVAL COMMERCIAL PRACTICES. 
14. A Prohibition of Certain Commercial Practices. 

Especially be it commanded on the part of our lord the king, that 
no forestaller be suffered to- dwell in any town, — a man who^ is 
openly an oppressor of the poor, and the public enemy of the whole 
community and country; a man who, seeking his own evil gain, 
oppressing the poor and deceiving the rich, goes to meet corn, fish, 
herrings, or other articles for sale as they are being brought by 
land or water, carries them off, and contrives that they should be 
sold at a dearer rate. He deceives merchant strangers bringing 
merchandise by oft'ering to sell their wares for them, and telling" 
them that they might be dearer sold than the merchants expected; 
and so by craft and subtlety he deceives his town and his country. 
He that is convict thereof, the first time shall be amerced and lose 
the things so bought, and that according to the custom and ordi- 
nance of the town ; he that is convict the second time shall have judg- 
ment of the pillory ; at the third time he shall be imprisoned and 
make fine; the fourth time he shall abjure the town. And this 
judgment shall be given upon all manner of forestallers, and like- 
wise upon those that have given them counsel, help, or favor. 

15. Mediaeval Tricks of Trade. 

BY BERTHOLD VON REGENSBURG. 

The first are ye that work in clothing, silks, or wool or fur, 
shoes or gloves or girdles. Men can in nowise dispense with you; 
men must needs have clothing; therefore should ye so serve them 
as to do your work truly; not to steal half the cloth, or to use other 



DBVBLOPMBNT OP INDUSTRIAL SOCIETY 23 

guile, mixing iiair with 3'our wool or stretching it out longer, where- 
by a man thinketh to have gotten good cloth, yet thou hath stretched 
it to be longer than it should be, and maketh a good cloth into 
worthless stuff. Nowadays nO' man can find a good hat for thy 
falsehood ; the rain will poiir down through the brim into^ his bosom. 
Even such deceit is there in shoes, in furs, in curriers' work ; one 
man sells an old skin for a new, and how manifold are thy deceits 
no man knoweth so well as thou and thy master the devil. 

The second folk are such as work with iron tools. They should 
all be true and trustworthy in their office, whether they work by the 
day or the piece. When they labor by the day, they should not stand 
all the more idle that they may multiply the days at their work. If 
thou laborest by the piece, then thou shouldest not hasten too soon 
therefrom, that thou mayest be rid of the work as quickly as possi- 
ble, and that the house may fall down in a year or two. Thou 
shouldest work at it truly, even* as it were thy own. Thou smith, 
thou wilt shoe a steed with a shoe that is naught ; and the beast will 
go perchance scarce a mile thereon when it is already broken, and 
the horse may go lame, or a man be taken prisoner, or lose his life. 
Thou art a devil and an apostate. 

The third are such as are busied with trade ; we cannot do with- 
out them. They bring from one kingdomi tO' another what is good 
cheap there, and whatever is good cheap beyond the sea they bring 
to this town, and whatever is good cheap here they carry over the 
sea. Thou, trader, shouldst trust God that He will find thee a livli- 
hood with true winnings. Yet now thou swearest so loudly how 
good thy wares are, and what profit thou givest the buyer thereby ; 
more than ten or thirty times takest thou the names of the saints in 
vain — God and all His saints, for wares scarce worth five shillings! 
That which is worth five shillings thou sellest, maybe, sixpence 
higher than if thou hadst not been a blasphemer of our Lord, for 
thou swearest loud and boldly : "I have been already offered far 
more for these wares" : and that is a lie. And if thou wilt buy any- 
thing from simple folk, thou turnest all thy mind to see how thou 
mayst get it from him without money, and weavest many lies be- 
fore his face ; and thou biddest thy partner go to the fair also, and 
goest then a while away and say est to thy partner what thoa wilt 
give the man for his wares, and biddest him come and offer less. 
Then the simple country fellow is affrightened, and will gladly see 
thee come back. "Of a truth," thou sayest, "by all the saints, no 
man will give thee so much for this as I !" Yet another would have 
given more. 

The fourth are such as sell meat and drink, which no man can 



24 



READINGS IN ECONOMIC PROBLEMS 



disregard. Wherefore it is all the more needful that they shouldst 
be true and honest therein ; for other deceit dealeth only with earth- 
ly goods, but this deceit with a man's body. If thou off erst measly 
or rotten flesh that thou hast kept so long until it be corrupt, then 
art thou guilty perchance of one man's life, perchance of ten. Or 
if thou offerest flesh that was unwholesome before the slaughter, or 
unripe of age, which thou knowest well and yet givest it for sale, 
so that folk eat it intO' their clean souls which are so dear a treasure 
to Almighty God, then dost thou corrupt the noble treasure which 
God hast buried in every man ; thou art guilty of the blood of these 
folk. The same say I of him who sellesth fish. So are certain inn- 
keepers and cooks in the town, who keep their sodden flesh too 
long, whereof a guest eatest and falleth sick thereafter for his life 
long. So also do certain others betray folk with corrupt wine or 
mouldy beer, unsodden mead, or give false measure, or mix water 
with the wine. Certain others, again, bake rotten corn to bread, 
whereby a man may lightly eat his own death ; and they salt their 
bread which is most unwholesome. 

The fifth folk are such as till the earth for wine or corn. They 
should live truly towards their lords and towards their fellows, and 
among each other ; not plough one over the other's landmark, nor 
trespass nor reap beyond the mark, nor feed their cattle to another's 
harm, nor betray their fellows to the lord. Ye lords, ye deal some- 
times so ill with your poor folk, and can never tax them too high ; 
ye would fain ever tax them higher and higher. Thou boor, thou 
bringest to the town a load of wood that is all full of crooked billets 
beneath ; so sellest thou air for wood ! And the hay thou layest so 
cunningly on the wagon that no man can profit thereby ; thou art a 
right false deciever. 

The sixth folk are all that deal with medicine, and these must take 
great head against untruth. He who is no good master of that art, 
let him in nowise undertake it, or folks' blood will be upon his 
head. Take heed, thou doctor, and keep thyself from this as thou 
lovest the kingdom of heavn. We have murderers enough without 
thee to slay honest folk. 

So are some men deceivers and liars like the craftsmen. The 
shoemaker sayeth, "See, there are two most excellent soles," and he 
hath burned them before the fire. And the baker floods his dough 
with yeast, so that thou hath bought mere air for bread. And the 
huxter pours sometimes beer or water intO' his oil ; and the butcher 
will sell calves' flesh at times, saying: "It is three weeks old," and 
it is scarce a week old. 



DBVBLOPMBNT OF INDUSTRIAL SOCIETY 25 

G. EARLY ECONOMIC THEORY. 
16. The Characteristics of Mercantilist Doctrine. 

BY JOHN KKLLS INGRAM. 

The Mercantile doctrine, stated in its most extreme form, makes 
wealth and money identical, and regards it therefore as the great 
O'bject of the community so to conduct its dealings with other na- 
tions as to attract to itself the largest possible share of the precious 
metals. Each country must seek to export the utmost possible quan- 
tity of its own manufactures, and to import as little as possible of 
those of other countries,- receiving the difference of the two values 
in gold and silver. This difference is called the balance of trade, 
and the balance is favorable when more money is received than is 
paid. Governments must resort to all available expedients for the 
purpose of securing such a balance. 

But this statement of the doctrine does not represent correctly 
the views of all belonging to the Mercantilist school. Many of that 
school were much too clear-sighted to entertain the belief that wealth 
consists exclusively in gold and silver. The mercantilists may be 
best described by a set of theoretical tendencies, commonly found in 
combination, though severally prevailing in different degrees in 
different minds. These may be enumerated as follows: — (i) To- 
wards over-estimating the importance of possessing a large amount 
of the precious metals; (2) towards an undue exaltation (a) of 
foreign trade over domestic, and (b) of the industry which works 
up materials over the industry which provides them; (3) towards 
attaching toO' high a value to a dense population as an element of 
national strength ; and, (4) towards invoking the action of the 
state in furthering artificially the attainment of the several ends 
thus proposed. 

If we consider the contemporary position of Western Europe, 
we shall have no difficulty in understanding how these tendencies 
would arise. The discoveries in the New World had led tO' a large 
development of the European currencies. A new "money economy" 
had arisen. The mercantilists saw that money *was in universal 
demand, and that it put in the hands of its possessor the power of 
acquiring all other commodities. The period, again, was marked by 
the formation of great states, with powerful Governments at their 
head. These Governments required men and money for the main- 
tenance of permanent armies and for court expenses. Taxation 
grew with the demands of the monarchies.- Statesmen saw that for 
their own political ends industry must flourish. But manufactures. 



26 READINGS IN ECONOMIC PROBLEMS 

because they made possible a denser population and a larger total 
volume of exports than agriculture, became the object of special 
Governmental favor and patronage. The growth oi manufactures 
reacted on commerce, to which a new and mighty arena had been 
opened by the establishment of colo^nies. The aim, of statesmen was 
to make the colonial trade a new source of public revenue. Working 
for their own power, the nations entered into a competitive struggle 
in the economic field. A national economic interest came tO' exist, 
of which the Government made itself the representative head. States 
became a sort of artificial hothouses for the rearing of urban in- 
dustries. Production was subjected to systematic regulation with 
the object of securing the goodness and the cheapness of the ex- 
ported articles, and so maintaining the place of the nation in foreign 
markets. The industrial control was exercised, in part directly by 
the state, but largely through privileged corporations. High duties 
on imports were resorted to in the interests of national production. 
Commercial treaties aimed at excluding the competition of other 
nations in foreign markets and the exclusion of foreign goods, other 
than raw materials, from the domestic market. The colonies were 
prohibited from trading with European nations other than the par- 
ent country. The mercantile doctrine was essentially the theoretical 
counterpart of the practical activities of the times. Governments 
were led to it by the force of outward circumstance. 

We must pronounce the universal enthusiasm of this perioid to 
have been essentially just, as leading the nations into the main ave- 
nues of general social development. The organization of agricul- 
ture could not at that time make any marked progress, for it was 
still in the hands of the feudal class. The industry of the towns 
had to precede that of the country. And it is plain that in the life 
of the manufacturing proletariat a systematic discipline could first 
be applied, to be afterwards extended to the rural populations. 
Technical skill must have been promoted by the encouragement of 
industry and commerce. Nev/ formis of national production were 
fostered by attracting workingmen from other countries, and by 
lightening the burden of taxation on struggling industries. Com- 
munication and transport were rapidly improved with a view to 
facilitate traffic. And, not the least important, the social dignity 
of the industrial professions was enhanced. 



DBVBLOPMENT OF INDUSTRIAL SOCIETY 27 

H. ASPECTS OF THE INDUSTRIAL REVOEUTION. 
17. The Characteristics of the English People. 

BY AIvFRED MARSH AI,!,. 

England's geographical position caused her to be peopled by the 
strongest members of the strongest ra,ces of northern Europe; a 
process of natural selection brought tO' her shores those members 
of each successive migratory wave who were most 'daring and self- 
reliant. Her climate is better adapted to sustain energy than any 
other in the northern hemisphere. She is divided by no high hills, 
and no part of her territory is more than twenty miles from naviga- 
ble water. The strength and wise policy of the early kings pre- 
vented artificial barriers from being raised by local magnates. 

The custom of primogeniture inclined the younger sons of noble 
families to seek their own fortunes ; and having no special caste 
privileges they mixed readily with the coinmon people. The fusion 
of diflrerent ranks tended to make politics business-like; while it 
warmed the veins of business adventure with the generous daring 
and romantic aspirations of noble blood. Resolute in resistance to 
tyranny, they have submitted tO' authority justified by reason. They 
have known how tO' combine order and freedom. They alone have 
united a thorough reverence of the past with a power of living for 
the future. 

The English yeoman archer was the forerunner of the English 
artisan. He had the same pride in the superiority of his food and 
his physique over those of his continental rivals; he, had the same 
indomitable perseverance in acquiring perfect control over the use 
of his hands, the same independence and the same power of self- 
control and of rising to emergencies. 

But the industrial facilities of the Englishmen remained latent 
for a long time. They had not inherited much acquaintance with 
nor much care for the comforts and luxuries of civilization. In 
manufactures they lagged behind the rest of Europe. For a long 
tim.e there was no sign on the surface of future coimmerce. They 
had not originally, and they have not now, the special liking for 
dealing and bargaining, nor for the more abstract side of financial 
business which is found among Jews, Italians, and Greeks. Trade 
with 'them has always taken the form of action rather than man- 
ouvering and speculative combination. Even now the subtlest spec- 
ulation on the London Stock Exchange is done by those races which 
have inherited the same aptitude for trading that the English have 
for action. The latter characteristic has impelled the English into 



28 READINGS IN ECONOMIC PROBLEMS 

production, into discovery, invention, business organization, and into 
navigation. Their commercial activities are a result of peculiar con- 
ditions and a development of these latter activities. 

1 8. English Industry on the Eve of the Revolution. 

BY ARNOI^D TOYNBe::^;. 

« 

I must ask you to transport yourselves in imagination to Eng- 
land as it was a' century and a quarter ago: Then the farms were 
small and the method of cultivation primitive. The old system of 
common cultivation was still to be seen at work in a large number 
of parishes in the Midland counties. Rotation of crops was only 
imperfectly understood; the practice of growing winter roots and 
artificial grasses was only slowly spreading. "As for the sheep," 
said an old Norfolk shepherd, speaking of a still more recent period, 
"they hadn't such food provided for them as they have now. Tn 
winter there was little to eat except what God Almighty sent for 
them, and when the snow was deep on the ground they ate the ling 
or died off." The cotton industry, which now supports more than 
half a million of persons, was then oppressed by Parliament as a 
possible rival to older industries, and was too insignificant to be 
mentioned more than once, and then incidentally, by Adam Smith. 
The iron industry, with which the material greatness of England 
has during the present century been so conspicuously associated, was 
gradually dying out. Much of the ore was still smelted by charcoal 
in small furnaces blown by leather bellows worked by oxen. Not 
cotton and iron, but wool was considered, in those days, the great 
pillar of national prosperity. There were few people who doubted 
but that the ruin of England would follow the decay of this cher- 
ished industry. It was only philosophers like Bishop Berkley, who, 
going very deep into matters, ventured to ask whether other coun- 
tries had not flourished without the woolen trade. 

To show you the external conditions of industrial life in the 
middle of the last century, I cannot, I think, do better than give a 
short description of the way in which wool was manufactured in 
the neighbourhood of Leeds. The business was in the hands of 
small master-manufacturers who lived not in the town but in home- 
steads in the fields, and rented little pasture-farms. Every master 
worked with his o-wn hands, and nearly all the processes through 
which the wool was put — the spinning, the weaving, and the dyeing 
— were carried on in his own house. Few owned more than three 
or four looms, or employed more than eight or ten people — men, 
women, and children. This method of carrying on the trade was 



DBVBLOPMBNT OP INDUSTRIAL SOCIBTY 29 

called the domestic system. "What I mean," said a witness, "by the 
domestic system is the little clothiers living' in villages or detached 
places, with all their comforts, carrying on business with their own 
capital ; every one must have some capital, more or less, to carry 
on his trade, and they are in some degree little merchants as well 
as manufacturers, in Yorkshire." A spinning-wheel was tO' be 
found in every cottage and farm-house in the kingdom, a loom in 
every village. 

The mention of this fact brings me to another point in the eco- 
nomic history of this period — the extremely narrow circle in which 
trade moved. In many districts the famiers and labourers used few 
things which were not the work of their own hands, or which had 
not been manufactured a few miles from their homes. The poet 
Wordsworth's account of the farmers' families in Westmoreland, 
who grew on their own land the corn with which they were fed, 
spun in their own homes the wool with which they were clothed, and 
supplied the rest of their wants by the sale of yarn in the neighbor- 
ing market town, was not so inapplicable to other parts of England 
as we might at first imagine. If the inland trade was thus circum- 
scribed, we shall not be surprised to find that our foreign trade was, 
compared with its present dimensions, on a tiny scale. 

Though there were periods of keen distress, there was no such 
thing as long-continued wide-spread depression of trade. Over-pro- 
duction was impossible when the producer lived next door to the 
consumer, and knew his wants as well as the country shoemaker 
of today knows the number of pairs of boots that are wanted in his 
village. And when foreign trade was so insignificant, wars and 
rumours of wars could exercise but little influence over the general 
circle of commerce. 

The expense of carriage was eno'rmous — it cost forty shillings 
to send a ton of coal from Manchester tO' Liverpool — ^^and it was as 
slow as it was expensive. Adam Smith tells us that it took a broad- 
wheeled wagon, drawn by eight horses, and attended by two men, 
three weeks to carry four tons of goods from London to Edinburgh. 
The roads — even the main roads — were often impassable. A famous 
traveller describes how the high road between Preston and Wigan 
had, even in summer, ruts four feet deep, floating with mud; and 
in many parts of the country the principal meaiis of communication 
were tracks used by pack-horses. Was it not natural that, shut up 
within such narrow confines, unstimulated by wide markets and 
varied intercourse, manufactures advanced but slowly and inven- 
tions were rare? Man's life moved on fromi generation to genera- 



30 



READINGS IN ECONOMIC PROBLEMS 



tion in a quiet course which would seem to us a dull, unvarying 
routine. 

The majority of employers were small masters — manufacturers 
like those already described, who, in ideas and habits of life, were 
little removed from the workmen, out of whose ranks they had 
risen, and to whose ranks they might return once more. There were, 
of course, even then capitalist employers, but on a small scale; nor 
was their attitude to their workmen very different from that of the 
little masters in the same trade. Few of the small masters of whom 
I have spoken did not work with their own hands ; and it was the 
common thing for them to teach their apprentices the trade. Both 
the apprentices, for whose moral education he was responsible, and 
the journeymen were lodged and boarded in the master's house. 
Between men living in such close and continuous relations the bonds 
were naturally very intimate. Nor were these bonds loosened when 
the journeyman married and lived in his own house. The master 
knew all his affairs, his particular wants, his peculiarities, his re- 
sources, the number of his children, as well as he did before. If the 
weaver was sick, the master lent him money ; if trade was slack he 
kept him on at a loss. "Masters and men," said an employer, "were 
in general so joined together in sentiment, and, if I may be permit- 
ted to use the term, in love to each other, that they did not wish to 
be separated if they could help it." And the workmen corroborated 
the assertion. "It seldom happens," said a weaver, "that the small 
clothiers change their men except in case of sickness and death." 
It was not uncommon for a workman tO' be employed by the same 
master for forty years ; and the migration of labourers in search of 
work was small compared with what goes on in the present day. A 
woikman would live and die on the spot where he was born, and 
the same family would remain for generations working for the 
same employers in the same village. Under such conditions the mas- 
ter busies himself with the welfare of the workman, and the educa- 
tion of his children ; the workman eagerly promotes the interests of 
the master, and watches over the fortunes of the house. They are 
not two families but one. 

There is yet one other characteristic of industry in those days 
which remains for us to scrutinise. This is the network of restric- 
tions and regulations in which it ^\'as entangled and which exercised 
an important influence over both its inner and its outer life. Most 
conspicuous were the combination laws, — laws which made it illegal 
for labourers to combine to raise wages, or to strike. "We have no 
Acts of Parliament," says Adam Smith, "against combining to lower 
the price of work, but many agamst combmmg to raise it." And in 



DBFBLOPMENT OP INDUSTRIAL SOCIETY 



31 



another passage he describes a strike as generally ending, "in noth- 
ing but the punishment or ruin of the ringleaders." And not only 
was comibination to raise wages illegal, but emigration from parish 
to parish in search of work was rendered almost impossible by the 
law. These laws, which cruelly hindered the workman in his efforts 
to secure a livelihood, were bad ; but there were other laws directly 
affecting the position of the workman as a citizen which were worse. 
I select one example. The law of Master and Servant made breach 
of contract on the part of an employer a civil offence, on the part of 
the labourer a crime. 

Except as a member of a mob, the labourer had not a shred of 
political influence. The power of making laws was concentracted 
in the hands of the landowners, the great merchant princes, and a 
small knot of capitalist-manufacturers who wielded that power in 
the interests of their class, rather than f Oir the good of the people. 
Nor is the famous assertion of the great economist that, whenever 
Parliament attempted to regulate differences between masters and 
their workmen, its counsellors were always the masters, unsupported 
by facts. It receives lively illustration from the pen of a pamph- 
leteer of the period, who' remarks with an air of great naturalness 
and sifnplicity that "the gentlemen and magistrates ought to aid and 
encourage the clothier in the reduction of the price of labour, as far 
as is consistent, with the laws of humanity, and necessary for the 
preservation of foreig'n trade."' The position of the workman was 
a transitional one. He halted half-way between the position of the 
serf and the position of the citizen ; he was treated with kindness 
by those who injured him ; he was protected, oppressed, dependent. 

ig. The Antecedents of the Revolution, 

BY WII^UAM CUNNINGHAM. 

In the latter part of the eighteenth century there was a burst 
of inventive genius in Great Britain. Many improvements were 
rapidly introduced, and the useful arts, as practised from time imi- 
memorial, were revolutionised in a few years. This was no mere 
accident, but was at least partly due to the fact that the conditions 
of economic life had become more favourable to such change than 
they had ever been before. The age of geographical discovery had 
paved the way for the age of invention ; England had succeeded in 
surpassing each of the rivals who during a century and a half had 
striven with her for the commercial supremacy of the world ; her 
predominance afforded the English inventors of the eighteenth cen- 
tury unexampled opportunities for turning" their talents to account. 



32 READINGS IN ECONOMIC PROBLEMS 

Holland was no longer the carrier of the world; her manufac- 
tures had declined in importance. In France over-centralization 
destroyed the initiative of the people and injured all branches of 
industry and agriculture. English shipping had increased, and dis- 
tant markets for national wares had been opened. The East Indies 
were willing to accept unlimited supplies of cotton cloth; and the 
continent of Europe and the colonies of America were largely de- 
pendent on Great Britain for woolen goods; manufacturing could 
be conducted on a larger and larger scale without immediate risk of 
glutting the widespread demand by overproduction. So long as 
commerce had been organised as an intercivic affair, or on. the old 
regulated lines of exclusive privileges in limited markets, there 
could not have been any such stimulus to the invention and intro- 
duction of machinery as the world-wide markets naturally afforded. 

But more than this : the mines of the New World and the suc- 
cessful commerce with the East had given England the material 
means for the formation of large amounts of capital, which were 
now available for employment. There had been much admirable 
ingenuity among seventeenth centur}^ engineers and mechanics, but 
they were hampered by want of capital; their projects could not be 
carried out. In the eighteenth century London had becofhe the 
monetary centre of the world, and it was' no longer impossible to 
venture on the long and costly experiments that were often needed 
to render some mechanical improvement a financial success. We are 
not detracting from the genius of Watt or Arkwright if we say that 
they seized and made the most of opportunities, such as no other 
men had ever had before. Had they lived under the conditions 
which were in vogue in preceding centuries, both as tO' demand for 
goods and the supply of capital, these great inventors could only 
have enjoyed the meagre distinction which future generations accord 
to men who were in advance of their times. 

The great geographical discoveries were the result of long-con- 
tinued and conscious effort, directed to a clearly understood aim; 
great expeditions had to be organised to sail on unknown seas and 
establish friendly relations with distant potentates. Explorers were 
forced to wait on courtly patronage and royal initiative; but me- 
chanical invention has run a different course. The coincidence of 
the two phenomena, a world-wide demand and a large supply of 
capital, enabled humble and unknown men to push on step by step ; 
political prestige and elaborate organisation were not so essential 
as in schemes for colonization; mechanical skill and personal inge- 
nuity had at last obtained their chance. The new industrial era, 
which the age of invention brought in its train, has offered a free 



DBVBLOPMBNT OF INDUSTRIAL SOCIETY 33 

field and given the greatest rewards to individual enterprise. It is 
commonly said that the physical advantage of England in the pos- 
session of enormous supplies of coal and iron side by side, have 
enabled her to out-distance her rivals, not only in commerce but in 
industry; still, the proximity and quantity of coal and iron do not 
in themselves account for her success completely ; in the case of 
such inventions as Arkwright's they do- not account for it at all. 
The favorable conditions which English manufacturers enjoyed, in 
the eighteenth century, and the reliance on individual enterprise 
which had been traditional in Great Britain, were not unimportant 
factors in rendering this island the workshop of the world. 

20. The Nature and Scope of the Industrial Revolution. 

BY J. H. CI.APHAM. 

No region of Europe remained altogether unaffected by that long 
series of economic developments which has changed the face and 
profoundly affected the structure of modern society. It was no 
mere industrial revolution ; its story is not a list of inventions or a 
biography of inventors. Nor is it simply the story oi capital and 
capitalistic production. Side by side with mechanical invention, the 
rising power of capital, the extension of economic freedom, and the 
expansion of international trade went an astonishing growth in pop- 
ulation and a partial introduction of the methods and results of exact 
science intO' economic affairs. The distinctive mark of economic 
history during this period is to be found, not in any change or group 
of changes, but rather in the coincidence of many types of change 
and the rapidity with which some of these types developed. Every- 
where there was movement, but the causes of the movement were 
infinitely varied. 

The whole eighteenth century had been an age of steady indus- 
trial development and of great commercial activity. Intercourse 
among the nations was more frequent and more free than ever be- 
fore. The more or less scientific and comparative study of natural 
resources was now no new thing. Imitation of superior foreign 
methods in agriculture, commerce, and the arts, was keenly pur- 
sued. There was an accelerating accumulation of capital. Banking, 
the necessary prerequisite tO' investment and the organ of highly 
developed commerce, had made conspicuous progress. 

Trade was cutting its own channels, wherever Government would 
permit. In the more advanced countries it had refused, long before 
the middle of the eighteenth century, to confine itself to fairs and 



34 



READINGS IN ECONOMIC PROBLEMS 



markets, after the mediaeval fashion. It had become an everyday 
matter, had ceased to be a thing of times and seasons. 

A widespread care for the improvement of internal means of 
communication, combined wih an ever-growing international trade, 
had quickened the pulse of economic life. In Holland, Italy, and 
even bankrupt France, the work went on. In Great Britain the task 
of improving river navigation, reconstructing roads, and cutting 
navigable canals was in full swing in the seventies. Because of 
excess of tolls elsewhere, Britain alone was able to make full use of 
the work of the road and canal builders. 

England exemplified the close connection which must always 
exist between improvement in the means of transport, the concen- 
tration of population, and a progressive agriculture. Where the 
cultivator works only to supply his own needs he rarely escapes from 
the crushing compulsion of traditional methods. The demand of 
the town and roads are essential if there is tO' be rapid movement on 
the land. In England the growth of London, to which most of the 
new roads led, furnished a main driving force. Decline in com- 
mon field husbandry was associated in Great Britain with free and 
rational methods and with spontaneous agricultural progress. 

The familiar series of revolutionary inventions towards the close 
of the century fell upon prepared soil. In all the western nations 
there existed some mining and manufacturing on a large scale, and 
many trades in which the hand-workers were tO' a considerable ex- 
tent dependent on the capitalist employer. Large and small indus- 
trial enterprises were everywhere encouraged by the governments. 
The progress in organization along industrial lines was due mainly 
to the fact that industrial establishments worked for export and so 
were brought under the influence of a commercial S3^stem already 
organized on capitalistic lines. 

A right instinct has selected the invention of spinning machin- 
ery and the perfection of the steam-engine as the chief industrial 
events of the later eighteenth century. The first led to the reor- 
ganization of what had long been the greatest group of industries ; 
the second furnished motive power for both new and old mechanical 
processes. But they were only the most important links in a long 
chain of improvements which freer industry, increasing skill and 
capital, expanding commerce, and a more scientific handling of 
technical problems, introduced into various branches of manufac- 
ture. In almost all branches of industry England evolved and ap- 
plied fresh methods of production. Of great significance for the 
general progress of manufacturing was the increased production of 
raw iron. Of even greater significance was the establishment, dur- 



DBVBLOPMBNT OF INDUSTRIAL SOCIETY 35 

ing the first forty years of the nineteenth century, of mechanical en- 
gineering as the organized capitalistic industry, upon which all other 
industries were beginning to depend. 

The cotton trade occupies an unique position in the general move- 
ment. It was young ; in the eighteenth century its various parts had 
been but imperfectly organized; and, consequently, it was' adapt- 
able. The wool-working trades on the contrary were old, highly 
organized, and in certain districts most conservative. It is in no 
way surprising therefore that machinery and steam were more slow- 
ly introduced in them than in the cotton trade. Wool and flax and 
cotton spinning on the wheel died as the machine gained ground. 
Cotton, an exotic, had never been spun extensively outside the 
actual manufacturing districts. As a result the work passed much 
more quickly than that of spinning wool intO' the mills. 

In fact few trades remained untouched by the general advance 
in technique and the movement towards a more capitalistic organi- 
zation. To the stead})" improvement of manufacturing processes 
were added the new and expensive motor power, better and more 
complex machines, and the new knowledge of the natural sciences. 
Trades ancillary to those of spinning and weaving, such as calico- 
printing, bleaching, and dyeing, were refashioned. Machinery and 
chemistry began to influence the ancient and conservative crafts of 
tanning and leather-vv'orking. In pottery-making, in printing, in 
brewing, in glass-making, and in a score of other industries, methods 
were revised and the scale of operations for the individual firm ex- 
tended. The power-driven machine took hold even of simiple crafts 
like carpentry and shoemaking. In coal-mining the combined ef- 
fects of the new power, the new needs, and the new knowledge were 
conspicuous. It was in the mines that steam had first been used 
for pumping. Yet all these things were but small beginnings com- 
pared with the developments of the later nineteenth century. 

The system of transportation consequent upon the changes men- 
tioned was not developed until well in the nineteenth century. Turn- 
pikes tended to become more numerous and to be better laid and 
better graded. Work on harbors and estuaries and docks was un- 
dertaken concurrently with that on roads. Canals were constructed. 
The Napoleonic wars witnessed the beginnings, the peace the utili- 
sation of steam transport both on land and sea. It was in the year 
of W^aterloo that a steamer first made the passage from^ London to 
Glasgow. Yet progress was slow. In fact the second quarter of 
the nineteenth century was not really an age of steam navigation. 
On land a more real and rapid revolution occurred ; but it remained 
incomplete in the early forties. The railway found the reform of 



36 READINGS IN ECONOMIC PROBLEMS 

the old means of transport still unfinished. The electric telegraph, 
which has joined with the railway to create the modern market, had 
hardly passed the experimental stag'e; and the short-sighted critics 
who could treat the railway as a mere nuisance or a novel luxury 
had but recently been silenced. 

21. How Machinery Invades Correlated Industries. 

BY KARIv MARX. 

A radical change in the mode of production in one sphere of in- 
dustry involves a similar change in other spheres. This happens at 
first in such branches of industry as are connected together by being 
distinct steps in the manufacture of a single article, cloth for in- 
stance, and yet are separated by the division of labor in such a way 
that at each step an independent commodity is produced. Thus 
spinning by machinery made weaving by miachinery a necessity, and 
both together made imperative the mechanical and chemical revolu- 
tion that took place in bleaching, printing, and dyeing. So too, on 
the other hand, the revolutio'n in cotton spinning called forth the 
invention of the gin for separating the seeds from the cotton fiber; 
it was only by means of this invention that the production of cotton 
became possible on the enormous scale at present required. 

But, more especially, the revolution of the modes of production 
of industry and agriculture made necessary a revolution in the means 
of communication and of transportation. These, in the form in 
which they had been handed down from the earlier period, became 
unbearable trammels on modern industry, with its feverish haste of 
production, its enormous extent, its constant flinging of capital and 
labor from one sphere of production into another, and its newly es- 
tablished connections with the markets oi the whole world. Hence, 
apart from the radical changes introduced in the construction of 
sailing vessels, the means of communication and transportation be- 
came gradually adapted to the modes of production of mechanical 
industry, by the creation of a system of river steamers, railways, 
ocean steamers, and telegraphs. But the huge masses of iron that 
had now to be forged, to be welded, to be cut, to be bored, and to 
be shaped, demanded, on their part, monster machines, for the con- 
struction of which the methods of the manufacturing period were 
utterly inadequate. 

Modern industry had therefore itself to take in hand the ma- 
chine, its characteristic instrument of production, and to construct 
machines by machines. It was not till it did this, that it built up 
for itself a fitting technical foundation and stood on its own feet. 



DBVnWPMBNT OP INDUSTRIAL SOCIETY 



37 



Machinery, simultaneously with the increasing use of it, in the first 
decades of this century, appropriated by degrees the fabrication of 
machines proper. But it was only during the decade preceding 
1866 that the construction of railways and ocean steamers on a stu- 
pendous scale called into existence the cyclopean machines now em- 
ployed in the construction of "prime movers," or motors. 

22. A Socialistic View of the Industrial Revolution. 

BY AI,I.AN L. BENSON. 

Poverty did not go out when steam and electricity came in. On 
the contrary, the fear of want became intensified. Now, nobody 
who has not capital can live unless he can get a job. In the days 
that preceded the steam engine, nobody had tO' look for a job. The 
shoemaker could make shoes for his neighbors. The weaver could 
weave cloth. Bach could work at his trade without anybody's per- 
mission, because the tools of his trade were few and inexpensive. 
Now, neither of them can work at his trade, because the tools of 
his trade have become numerous and expensive. The tools of the 
shoemaker's trade are in the great factory that covers, perhaps, a 
dozen acres. The tools of the weaver's trade are in another enor- 
mous factory. Neither the shoemaker nor the weaver can ever 
hope to own the tools of his trade. Nor, with the little hand-tools 
of the past centuries, can either of them compete with the modern 
factories. The shoe trust, with steam, electricity, and machinery, 
can make a pair of shoes at a price that no. shoemaker, working by 
hand, could touch. 

Thus the hand-workers have been driven to knock at the doors 
of the factories that rich men own and ask for work. If the rich 
men can see a profit in letting the poor men work, the poor men are 
permitted to work. If the rich men cannot see a profit in letting 
the poor men work, then the poor men may not work. Though there 
be the greatest need for shoes, if those in need have no money, the 
rich men lock up their factories and wave the workers away. The 
workers may starve, if they like. Their wives and children may 
starve. The workers may become tramps, criminals or maniacs ; 
their wives and their children may be driven into the street — but 
the rich men who^ closed their factories because they could see no 
profit in keeping them open, — these rich men take no part of the 
responsibility. They talk about "the laws of trade," gO' to their 
clubs and have a little smoke, and, perhaps, the next week give a 
few dollars to "worthy charity" and forget all about the workers. 



38 READINGS IN ECONOMIC PROBLEMS 

23. The Significance of the Revolution. 

BY GRANT ROBERTSON. 

The New England must be sought in Lancashire and the West 
Riding, in the coal-pits of Durham, Northumberland, and South 
Wales, in the Black Country and the Potteries. The industrial town 
partly creates, is partly created by, the industrial area. The division 
of labor, the concentration of population, followed inevitably the 
localization and distribution of the raw material of manufactures. 
Men and women, more and more penned into the towns, are depend- 
ent for their earnings, not on the sun and the rain, the soil and the 
seasons of the home land, but on the brains of engineers, on the com- 
mercial capacity of capitalists, on imports from East and West, on 
the bowels of the earth, and on specialized skill and mechanical 
powers. Three things they must have or perish — the raw material 
of their trade, food, and expanding markets. Every year the appli- 
cation of machinery and motor power stimulated enterprise on a 
large scale, and increased the profits of scientific organization. Every 
new invention facilitated the rate at which the total output could 
be increased, while it demanded a corresponding organization for 
distribution, exchange, and consumption. The object of the manu- 
facturer was to create and control markets and make their consump- 
tive capacity as elastic as his capacit}^ to produce. England as "a 
workshop for the world" involved a world ready to absorb the pro- 
ducts of the workshop, and the crux of the problem did not lie in 
the certainties of production, but in the potentialities of exchange 
and consumption. Hence the new economic data necessitated the 
rewriting of old and the writing of new chapters toi the theory of 
Political Economy, and the school of Ricardo is born out of the 
school of Adam Smith. The centre of political gravity slowly shifts 
with a shifting of the centre of economic gravity. The political and 
economic interests of a vast class of industrial workers and consum- 
ers, divorced from the land and linked with the capitalist and manu- 
facturing entrepreneur, became more and more opposed to the inter- 
ests of the landowner. 

By 1785 in our agricultural economy the results had cut sharply 
into the quick. Farming on a large scale, the increasing application 
of agricultural science, the consolidation of estates, and the enclos- 
ures, had combined to dislocate, and in some cases extinguish alto- 
gether, the yeoman and the cottager of the old order. By 1800 there 
was a marked diminution of the number of the small landowners 
and a steady disappearance of the village community as a coopera- 
tive organization for the cultivation of the soil. Of this revolution 



DBVBLOPMHNT OP INDUSTRIAL SOCIETY 



39 



the evolution of the "free-hand," the landless laborer working for 
wages, was a direct consequence. A new landed interest was in 
process of creation. Its chief function was to provide more and 
more food; its chief object to reap the profits of its combined duty 
and interest. Goldsmith's Deserted Village written in 1770, and 
the Corn Lazu of 1773, conveniently mark a point of departure. 
The legislature, controlled by the landed classes, tried to make Eng- 
land self-sufficient. As population increased the margin of cultiva- 
tion was forced down and prices went up. The need for increased 
.supplies could, under the law of diminishing returns, be met only 
by increased cost of production. The rise in rent kept pace with 
the rise in prices to the landlord's gain ; but the problem of pauper- 
ism, rooted in low wages and high prices, yearly became more for- 
midable. The result was the formulation oi new fundamental prob- 
lems of government. Can agricultural science, aided by Legisla- 
tion, procure the necessary supply of food from home resources? 
In the national economy which is the more important, agriculture 
or manufactures? Which is socially the more beneficial, cheap food 
or a lower margin of cultivation and higher rents? Is the landed 
interest or the industrial interest tO' have the deciding voice in poli- 
tics? 

The new industrial interest was coming to rest upon a new social 
economy. Since 1750 there had been a vast increase of capital. The 
political expansion of the empire, the new markets across the seas, 
and the development of colonial possessions precede the Industrial 
Revolution. Because of the freedom of England from invasion, the 
country was spared the periodic devestation of fixed capital, and the 
hinderences to accumulation that invasion brought with it. The 
character of our citizens and the conditions of the epoch combined 
to focus the energies of the race on the creation of wealth, and the 
openings for profitable investments in agriculture, industry, and 
commerce put a premium on saving. We can broadly measure the 
increase in wealth by the fact that the financing of the agricultural 
and industriail revolution, and of the colossal eighteenth century 
wars, was accomplished from British resources alone. 

The "capitalist" in the strict economic sense was no new appari- 
tion. Nor was industry working on a capitalistic basis new. What 
is new is, first, the capitalist entrepreneur, primarily a manufacturer, 
not a moneyed man engaged in commerce; secondly, the growth of 
a class of capitalist entrepreneurs ; thirdly, the gradual domination 
■of industry by that class ; and, fourthly, the type of industrial organ- 
ization that he creates and the scale on which he applies it. To 
Adam Smith a "manufacturer" was still a workman, working with 



40 



READINGS IN ECONOMIC PROBLEMS 



his own hands in his own home or workshop, with his own tools. 
The manufacturer of the Industrial Revolution is the modern master 
who provides capital, owns his mill or factory, together with the 
machinery and tools provided for his "hands," pays these "hands" 
wages, and creates and maintains a market. 

With the new capitalist is born the new industrial proletariat, 
that ever-increasing army of men and women who are wage-earners 
and are a new stratum in the economic world. The Revolution that 
dissolved the link between the peasant and the soil forged the bond 
that chained the wage-earner tO' the town. Swollen by the dislocated 
peasantry, by their own power to reproduce themselves in obedience 
to the increasing demand of capital and science for human hands 
and bodies, they have come to stay and to create another England. 
The slow establishment of a reserve of labor that can be called into 
the working line when trade requires it, and be thrust back when 
it is slack, the problems of unemployment and the unemployable, are 
not the least of the formidable enigmas forced on humanity by the 
wage-earner and the Industrial Revolution. 

While we can broadly trace three stages in the evolution — the 
first of inventions and new processes, the second of hydraulic power 
where industry is dependent upon water, the third of iron and steam 
where power can be brought to the workers — it is no less true that 
these stages are not chronologically separate, but are blended and, 
frequently, synchronous. Any picture grouping the features in 
clear-cut symmetry would be false to the facts. In different trades, 
in different areas, under var3'^ing conditions and degrees of pressure, 
an amazing diversity, not uniformity, is the prevailing note of the 
economic phenomena. The old order did not perish at a blow. The 
new was not introduced complete by a few remarkable inventions 
and a group of organizers. The peasant was not universally di- 
vorced from industry nor the industrial population from the soil. 
But in the stream- of tendencies and the competition between the old 
and the new every year saw one more stone in the ancient fabric 
dislodged, one more stone in the new fabric cemented. 

The face of the country was being altered. The new roads and 
the canals are made not for the traveler on pleasure bent, but to 
bring the places where men produce into communication with the 
centres of exchange. Mark, too, how the roads and canals more and 
more lead to and from the urban workshops, to and from the sea. 
From the sea the bulk of the raw material must come — to- the sea 
. much of the finished product will gO'. Commerce, like war, is an 
affair of positions to start with. England was quick to take ad- 
vantage of its strategic commercial position. The trend of population 



DEVBLOPMBNT OF INDUSTRIAL SOCIETY 



41 



is at first to the strategic and focal centres of a distributing, exchang- 
ing, bartering, and carrying trade. Then comes the revelation of 
internal resources. Geological formation underpins geographical 
configuration. From 1770 onwards a student with a geological 
map and some knowledge of the economic data of the new trades 
might predict a priori where the new industrial centres must be. In 
the whole island so bitten and fretted is the coast line that it is 
impossible to- place a pin-point anywhere on the map which is more 
than sixty miles from salt water. What this means for imports and 
exports needs no exposition. By 1801 imports and exports are an 
absolute necessity of bare existence. 

The country town is either transformed by industry or it slips 
into subordination to the new towns. These are not places which 
men and women inhabit through choice, but to live in, to produce, 
to exchange, to breed in, and to die. They are stamped with the 
feudalism of industry, a feudalism seated among factory chimneys, 
warehouses, the roar and glare of blast furnaces, the undying throb 
of machinery drowning the tramp of the wearied feet of men and 
women born tired and condemned to toil. Over the new towns are 
hung the banners and scutcheon of the industrial lords. Within 
there is the dull monotony of brick and stone, sweat and grime and 
smoke, unceasing noise, the stress of competition whose cessation 
means ruin. 

The new urban race living under new conditions is a new people. 
Its pleasures, hopes, fears, needs will be different, alike from those of 
the old cities, the old mercantilism, the old agriculture. It will create 
a new type of character, frame new values, hammer out from the 
dirt and roar of the teeming hives ideals of life and government 
bound to clash fiercely with the ideals inherited from a different past. 
It will ask for new creeds ; it will demand a new economics ; it will 
need and make a new literature. The rearrangement of the ele- 
ments of society, and the regrading of classes, will bury deeper and 
deeper each day the legal framework of the old order. The prob- 
lems of national physique, motherhood, childhood, education, pau- 
perism, citizenship, happiness are old ; but restated in the terms of a 
growing industrial democrac}' they become new, and with every 
decade more complex, urgent, and formidable. 



42 READINGS IN ECONOMIC PROBLEMS 

I. CHARACTERISTICS OF THF. NEW INDUSTRIALISM. 
24. The Function of Capital. 

BY J. DORSEY ]?0:RR]5ST. 

Before the Revohition capital had Httle significance except in 
agriculture and commerce. Such simple tools and machines as were 
used in manufacturing were the property of the workmen them- 
selves, and consequently had no such social importance as modern 
capital has. Except for the introduction of the great mechanical 
devices and the application of steam-power, capital could never have 
assumed the tremendous importance which it has attained. The 
function of capital, then, is the same in kind as it was before the 
beginning of machine industry, but the quantitative diflrerence is so 
great as to constitute "capitalism" a virtually new phenomenon. 

The immensity of modern industrial undertakings necessitates 
the employment of the surplus wealth of the entire community. No 
small company of men can furnish the requisite amount of capital. 
It is demanded in such gigantic quantities that it cannot be supplied 
by the managers of industry, nor even by those more conspicuous 
capitalists who' manipulate stocks and shape policies. These very 
wealthy men may own a large share of the whole ; well-to-do people 
who take nO' active part in business management also own a large 
share ; while the better class of artisans likewise supply hundreds 
of millions of capital, especially of that floating portion which is 
supplied through the banks for the payment of their own wages and 
the purchase of materials. Modern capitalistic production is essen- 
tially co-operative. 

The wide ownership of the means of production is an indication 
of the social character of production. Practically all of the available 
wealth of society is now directed to productive uses. If a completely 
socialistic scheme could be carried out, it would be necessary, un- 
less society should confi,scate all private property now held, to obtain 
the capital from those who are now furnishing it. If public bonds 
should be given to the present capitalists, it is difficult tO' see ho^v 
the new system would differ materially from the present one. In 
short, there has been developed, along with this great industrial sys- 
tem, a banking and credit system through which all wealth not re- 
served for consumption may be made available for production. Be- 
fore the Industrial Revolution, banking was of very minor import- 
ance. At present the enormous banking interests of all civilized 
countries and the equally important credit arrangements by which 
capital may easily be turned into the industries which need it, make 



DEVELOPMENT OF INDUSTRIAL SOCIETY 43 

possible the emiployment of the resources of the whole society in the 
production of the goods desired by society. 

The individual is compelled to serve society in caring for his own 
interests by turning back into the productive processes much of the 
profit derived from invested capital or managerial ability. The in- 
comes of the wealthy are largely turned back to productive purposes, 
making possible the enlargement of plants, the employment oi more 
laborers, the increase of production, the cheapening of prices. In 
many directions the consuming capacity of the individual, rich or 
poor, is limited. Extravagant consumption is possible to a certain 
extent, and is, perhaps, a growing evil. But the total waste of the 
rich is probably a small item which, if saved and distributed through- 
out the whole society, would be of little consequence. The chief 
use which the wealthy capitalist can make of the income O'f his 
capital is to add it to his capital and employ it in the production of 
still larger quantities of the goods of common consumption. The 
evil of the possession of great wealth lies rather in the unworthy 
social prestige and opportunity for corrupt use which its possession 
gives to the rich than in the greater amount of goods which the 
rich consume. The evils connected with capitalism should not blind 
us to the real efficiency of our present social system in harmonizing 
individual and social interests by controlling all surplus wealth in 
the interests of society. 

25. The Characteristics of the Factory System. 

BY CARL BUCHER. 

The factory system organizes the whole process of production ; 
it unites various kinds of workers, by mutual relations of control 
and subjection, into- a compact. and well-disciplined body, brings 
them together in a special business establishment, provides them with 
an extensive and complex outfit of the machinery of production, and 
thereby immensely increases their productive powers. Just as in an 
army corps ready for battle, troops of varied training and accoutre- 
ment — infantry, cavalry, and artillery regiments, pioneers, engineers, 
ammunition columns, and commissariat, — are welded into one, so 
under the factory system groups oif workers of varied skill and 
equipment are united and enabled to accomplish the most difficult 
tasks of production. 

The secret of the factory's strength for production thus lies in 
the effective utilization of labor. To accomplish this, it takes a pe- 
culiar road, which at first appears circuitous. It divides as far as 
possible all the work necessary to a process of production into its 



44 RBADINGS IN ECONOMIC PROBLEMS 

simplest elements, separates the difficult from the easy, the mechan- 
ical from the intellectual, the skilled from the rude. It thus arrives 
at a system of successive functions, and is enabled to employ simul- 
taneously and successively human powers of the most varied kind — 
trained and untrained men, women and children, workers with the 
hand and head, workers possessing technical, artistic, and commer- 
cial skill. The restriction of each individual to a small section of 
the process effects a mighty increase in the volume of work turned 
out. A hundred workmen in a factory accomplish more than a hun- 
dred independent master craftsmen, although each O'f the latter un- 
derstands the whole process, while none of the former understands 
more than a small part of it. 

The machine is not the essential feature of the factory, although 
the subdivision of work just described has, by breaking up labor 
into simple movements, multiplied the application of machinery. Its 
application attained its present importance only when men succeeded 
in securing a motive power that would work unintermittently, uni- 
formly and ubiquitously, namely, steam. An example will illus- 
trate. In 1787 the canton of Zurich had 34,ocx) male and female 
hand-spinners producing cotton yarn. After the introduction of 
English spinning machines a few factories, employing one-third the 
former number of workers, produced an even greater quantity of 
thread. What is the explanation? The machine? But was not the 
former spinning-wheel a machine ? Certainly it was, and a very 
ingenious one. Machine was thus ousted by machine. Or better, 
the entire spinning process had been decomposed into its simplest 
elements, and perfectly new operations had arisen for which even 
immature powers could in part be utilized. 

In the subdivision of work originate these further peculiarities 
of factory production — the necessity of manufacturing on a large 
scale, the requirement of a large capital, and the economic depend- 
ence of the workman. 

Finally, its large fixed capital assures to factory work greater 
steadiness in production than was possible under other systems. 
The manufacturer must go on producing, because he fears loss of 
interest and shrinkage in the value of his fixed capital, and because 
he can not afford to lose his trained body of workmen. 

26. The Machine Process. 

BY thorste;in b. veblen. 

In its bearing on modern life and modern business, the "machine 
process" means something more comprehensive and less external 



DEVELOPMBNT OP INDUSTRIAL SOCIETY 45 

than a mere aggregation of mechanical appliances. The civil engi- 
neer, the mechanical engineer, the mining expert, the industrial 
chemist, — the work of all these falls within the limits of the modern 
machine process. The scope of the process is larger than the ma- 
chine. Many agencies which are not to be classed as mechanical 
appliances have been drawn into the process, and have become inte- 
gral factors in it. Wherever manual dexterity, the rule of thumb, 
and the fortuitous conjectures of the seasons have been supplanted 
by a reasoned procedure on the basis of a systematic knowledge of 
the forces employed, there the mechanical industry is to be found, 
even in the absence of intricate mechanical contrivances. It is a 
question of the character of the process rather than a question of 
the contrivances employed. Chemistry, agricultural, and animal in- 
dustries, as carried on by modern methods and in due touch with 
the market, are to- be included in the modern complex of mechanical 
industry. 

Not one of the processes carried on by the use of a given outfit 
of appliances is independent of other processes going on elsewhere. 
Each draws upon and presupposes the proper working of many 
other processes of a similar mechanical character. Each of the 
processes in the mechanical industries follows some and precedes 
other processes in an endless sequence, into which each fits and to 
the requirements of which each must adapt its own working. The 
whole concert of industrial operations is to be taken as a machine 
process, made up of interlocking detail processes, rather than as a 
multiplicity of mechanical appliances each doing its particular work 
in severalty. The whole makes a more or less delicately balanced 
complex of sub-processes. 

LyOoked at in this way the industrial process shows two well- 
marked general characteristics: (a) the running maintenance of 
interstitial adjustments between the several sub-processes or branch- 
es of industry ; and (b) an unremitting requirement of quantitative 
precision, accuracy in point of tiine and sequence, in the proper in- 
clusion or exclusion of forces affecting the outcome, in the magni- 
tude of the various physical characteristics, weight, size, density, 
etc., of the materials handled as well as the materials used. This 
requirement of mechanical accuracy and nice adaptation to specific 
uses has led tO' a gradual enforcement of uniformity, to a reduction 
to staple grades and staple character in the materials handled, and 
to a thorough standardizing of tools and units of measurement. 
Standard physical measurements are the essence of the machine 
regime. 



46 READINGS IN ECONOMIC PROBLEMS 

Standardization has outrun urgent industrial needs and has pen- 
etrated every corfier of the mechanical industries. Modern com- 
munities show an unprecedented uniformity in legally adopted 
weights and measures. As a matter of course tools and the various 
structural materials used are made of standard sizes, shapes, and 
gauges. The adjustment and adaptation of part to part and of pro- 
cess to process has passed out of the category of craftsmanlike skill 
into the category oi mechanical standardization. Modern industry- 
has little use for, and can make little use of, what does not conform 
to the standard. This latter calls for toO' much of craftsmanlike 
skill, reflection, and individual elaboration, and is therefore not avail- 
able for economic use in the processes. Irregularity is itself a fault in 
any item, for it brings delay, and a delay at any point means a more 
or less far-reaching and intolerable retardation of the comprehen- 
sive industrial process at large. 

The materials and moving forces of industry are undergoing a 
like reduction to staple kinds, styles, grades, and gauges. The like 
is true of finished products. As regards the mass of civilized man- 
kind, the idiosyncrasies of the individual consumers are required 
to conform to^ the uniform gradations imposed upon consumable 
goods by the comprehensive mechanical processes of industry. Be- 
cause of this it follows that the demand for goods settles upon cer- 
tain defined lines of production which handle certain materials of 
definite grade, in certain, somewhat invariable, forms and propor- 
tions. Standardization means economy at nearly all points of the 
process of supplying goods, and at the same time it means certainty 
and expedition at nearly all points in the business operations in- 
volved in meeting current wants. It alsO' reduces the interdepend- 
ence of businesses to more definite terms. Machine production also 
leads to a standardization of services. 

By virtue of this concatenation of processes the modern indus- 
trial system at large bears the character of a comprehensive, bal- 
anced mechanical process. To an efficient working of this industrial 
process at large, the various constituent sub-processes must work in 
due coordination throughout the whole. Any degree of maladjust- 
ment in some degree hinders its working. Similarly, any detailed 
process or industrial plant will do its work tO' full advantage only 
when due adjustment is had between its work and the work done 
by the rest. The more fully a given industry has taken on the 
character of a mechanical process, the more urgent is the need of 
maintaining proper working arrangements with other industries. 



DBVBLOPMBNT OP INDUSTRIAL SOCIETY 47 

J. THE EXTENSION OF MODERN INDUSTRIALISM. 
27. The Competitive Victory of Western Culture. 

BY JAMES LRYCE. 

What is it that the traveler sees today in India, in Africa, in the 
two Americas, in Austraha, in the isles of the Pacific? He sees the 
smaller, weaker, and more backward races changing or vanishing 
under the impact of civilized man ; their languages disappearing ; 
their religious beliefs withering ; their tribal organizations dissol- 
ving; their customs fading slowly away. 

From the blending of others with immigrants streaming in, a 
hybrid race is growing up in which the stronger and more civilized 
element seems fated to predominate. ' In other cases people too 
large and powerful to lose their individuality are nevertheless begin- 
ning tO' be so affected by European influences as to find themselves 
passing into a new circle of ideas and a nev/ set of institutions. 
Change is everywhere, and the process of change is sO' rapid that 
the past will soon be forgotten. It is a past the like of which can 
never recur. 

There is one other aspect of the present age of the world that 
has a profound and novel meaning for the historian. The world is 
becoming one in an altogether new sense. More than four centuries 
ago the discovery of America marked the first step in the process 
by which the European races have now gained dominion over nearly 
the whole of the earth. The last great step was the partition of 
Africa a little more than twenty years agO'. 

Now, almost every part of the earth's surface, except the terri- 
tories of China and Japan, is either owned or controlled by five or 
six European races. Eight Great Powers sway the political destinies 
of the globe and there are only two- other countries that can be 
thought of as likely to enter after a while intO' the rank of the Great 
Powers. Similarly a few European tongues have overspread all the 
continents except Asia, and there it seems probable that those Euro- 
pean tongues will before long be learned and used by the educated 
classes in such wise as tO' bring those classes into touch with Euro'- 
pean ideas. It is likely that by 2000 A. D. more than nine-tenths 
of the human race will be speaking less than twenty languages. 

Already there are practically only four great religions in the 
world. Within a century the minor religions may be gone; and 
possibly only three great faiths will remain. Those things which 
are already strong are groiwing stronger ; those already weak are 
growing weaker and are ready to vanish away. Thus, as the earth 



48 READINGS IN ECONOMIC PROBLEMS 

has been narrowed through the new forces science has placed at 
her disposal, and as the larger human groups absorb and assimilate 
the smaller, the movements of politics, of economics, and of thought 
in each of its regions become more closely interwoven with those 
of every other. Finance, even more than politics, has now made 
the world one community, and finance is more closely interwoven 
with politics than ever before. 

World history is tending to become one history, the history no 
longer of many different races of mankind occasionally affecting 
one another's fortunes, but the history of mankind as a whole, the 
fortunes of each branch henceforth bound up with those of the 
others. 



II. 

FUNDAMENTAL INSTITUTIONS OF 
MODERN INDUSTRIAL SOCIETY.. 

A. COMPETITION. 
28. A Condemnation of Competition. 

BY CHARLES KINGSI^E^Y. 

Sweet competition! Heavenly maid! — Now-a-days hymned alike 
by penny-a-liners and philosophers as the groimd of all society — 
the only real preserver of the earth! Why not of Heaven, too? 
Perhaps there is competition among the angels, and Gabriel and 
Raphael have won their ranks by doing the maximum of worship 
on the miinimum of grace ? We shall know some day. In the mean- 
time, "these are thy works, thou parent of all good!" Man eating- 
man, eaten by man, in every variety of degree and method ! Why 
does not some enthusiastic political economist write an epic on "The 
Consecration of Cannibalism?" 

29, Economic Activity as a Struggle for Existence. 

BY ARTHUR FAIRBANKS. 

The conditions of struggle are all but universal in society. Even 
writers who' regard society as an organism point out a degree of 
competition between different functions and organs in the animal 
organism, and profess no surprise that with the less rigid structure 
of society, this competition becomes a far more important phase of 
all activity. 

It needs no second glance to satisfy one that the economic activ- 
ity of society may fittingly be called a struggle. Follow some indus- 
trial product from the factory up to the time when it is consimied. 
The manufacturer of cotton (goods chooses between competing 
places for his factory; the makers of his machinery are struggling 
with each other to produce most economically engines, looms, etc., 
that are best adapted to his work ; raw products he buys from sellers 
competing in the open market; labor he hires from among men 
who bid against each other for his work ; transportation companies 
■compete with one another in cheaply transferring his goods to mar- 



50 READINGS IN ECONOMIC PROBLEMS 

ket ; and, in the market, seller is struggling with seller for the priv- 
ilege of a sale with profit ; buyer and seller bargain together to agree 
on a price. The present century has seen barrier after barrier swept 
away, till the whole world enters more or less freely into the one 
struggle; family and social distinctions are being obliterated in the 
industrial world ; customis and laws in restraint of trade have been 
set aside. 

The result of this sudden expansion oi the industrial struggle 
is to force more clearly on thinkers the fact that civilization moves,, 
not away from struggle, but tO' newi forms of struggle. And the 
efforts to deal with the many difficulties which have arisen from this 
sudden change make it clear that it is not by seeking to prevent 
struggle, but by modifying its forms, that progress will be made. 
Laborers who suffered in an unequal struggle have won their rights 
by combining and entering the struggle as a larger unit. Groups 
of cooperative buyers have united to do' away with the petty compe- 
tition of the retail store, by elevating competition to a more reason- 
able plane. Nor are the greatest monopolies of the day altogether 
free from the higher forms of pressure in the economic struggle, 
uncontrolled as they may seem for a time. ■ 

The change in the fornii of the struggle modifies the competing 
units. More in evidence just now is the struggle between groups 
determined by class lines than groups determined by territorial 
lines. With the passing of the dominance O'f individualism, the 
struggle, apparently, is between larger groups. The truth is that 
a simple struggle is being succeeded by a complex struggle between 
different kinds of units. The individual is freed from numerous 
restrictions that used to hamper him, but the competition in which 
he engages is limited in a new way. Not only does increasing dif- 
ferentiation effectively limit the number with whom he competes, 
but much of the burden of the struggle is shifted from the shouilders 
of the isolated individual to the group of which he is a member. 
Group competes with group, and the individual competes only with 
the other members of the group. The town removes many phases 
of the struggle for existence from each individual, the state removes 
many others ; but within each political unit other ends call out the 
energ}^ of the individual citizen. The manufacturer, in competing 
with other manufacturing groups, removes from his workmen much 
of the stress of economic struggle, but, within definite lines, the 
workman has only the more bitter a battle to fight. 

But nO' -group organization has or can eliminate personal competi- 
tion between the members of a group. The actual outcome of the 
social process in which the fit tend to survive and multiply depends 



FUNDAMENTAL ECONOMIC INSTITUTIONS 51 

largely upon the organization of a given society. With the removal 
of rigid barriers there has developed a more or less definite appara- 
tus for weeding out the unfit, and advancing those who are fit for 
better things. In the contest for industrial position, the laborer who 
can most economically perform a given task is the only one to whom 
an employer can afford to give the task. Each industrial crisis con- 
stitutes a severe test for everyone in the industrial world ; the less 
fit are thrown out of their place in the industrial world, wherever 
it may be. The so-called "out-of-work" class simply consists of 
those whose work cannot be utilized. During periods of industrial 
expansion, the man of wisdom, skill, and vigor expects advance- 
ment, because new positions are being created for which these are 
the only recommendation. Always, everywhere, this contest for 
individual position is going on. 

30. Competition and Organization. 

BY CHARLES H. COO^EY. 

It seems to me that the fundamental point always touched upon 
in questions of competition is the meaning of competition in rela- 
tion to organization. Now what is the meaning of competition in 
this regard ? I take it to^ be simply an organizing process. The world 
is full of various agents. These ag'ents in one way or another are 
continually getting displaced in the social structure, by the death of 
individuals, the decay of groups and systems, etc. Some method 
must be found of constantly building up the organization. If there 
is any other method of doing this than competition in the broad 
sense I do not know what it is. There must be some means of com- 
paring and selecting the agents and adapting them to their work. 

Competition is not merely a cause of organization ; it is also an 
effect. As everywhere else in the interdependent social system, we 
find all influences interacting, each a cause of change in the other. 
Organization is a cause in that it furnishes motives and standards 
and methods of competition. These things are determined by cus- 
tom, by law, by public opinion, by the inherited ideas of men. 

Taking these points for granted, we come toi the question, What 
is the matter with existing competition? I should say the matter is 
simply that existing competition shares in the prevailing disintegra- 
tion of social structures. We are all familiar with this disintegra- 
tion. It is chiefly, though not entirely, economic in its origin. The re- 
sult is that the standards, the methods of competition, today, are very 
far from being what the most enlightened human nature would de- 



52 



READINGS IN ECONOMIC PROBLEMS 



sire to have them. They are what is sometimes called "individual- 
istic" in the bad sense of the word. 

Perhaps I can best indicate this by taking an example. Let lis 
suppose that there is a ship sailing on the seas, properly manned 
with officers and crew. Now, here is an organization. It may not 
be apparent at first that competition is going on in this little society ; 
but it is. If a mate does well, he may very likely get appointed cap- 
tain on the next cruise, or his wages may be raised. Or again the 
ship may be competing with another ship across the ocean and vari- 
ous advantages may accrue if it succeeds. Here is well-ordered com- 
petition in which merit succeeds. That is to say, the test of success is 
something for the good of society, namely, the welfare of the ship 
and of commerce. But suppose that the ship quite unexpectedly in 
the dark runs upon an iceberg. The captain and the crew are 
thrown into the water. The society immediately and entirely dis- 
appears. The individuals are all struggling in the water, and a new- 
kind of competition takes place. From the good of the ship and 
society, it falls back on the animal instinct for self-preservation. 
Man becomes a mere brute under these circumstances. The customs 
and modes of thought that keep society on a proper level are de- 
stroyed. 

Something analogous to this is widely prevalent in present 
society. To pass on to the question as to how competition may be- 
come better: It is by building up the social organization through 
competition itself and raising the level of that competition by the 
ordinary methods O'f human endeavor. 

31. The Competitive Principle in State-Owned Industries. 

BY WESTEIv WOODBURY WILLOUGHBY. 

P>en the ownership and direct operation of industrial concerns 
by the State are not necessarily excluded by the adoption of the 
competitive principle. As long as it appears that a given industry, 
if left in private hands, will be subjected to a control by a trust, 
whereby true competition is rendered impossible, the assumption 
by the State of its management will at least not lessen competition ; 
while, on the other hand, it will secure to the people generally the 
benefits flowing froin monopoly. 

In the second place, state operation of an industry may be justi- 
fied upon the competitive principle, if, by so doing, the industry 
is managed in such a way that a greater degree of competition will 
be maintained between the individuals employed than would be the 
case under private management. From the social standpoint it is 



FUNDAMENTAL ECONOMIC INSTITUTIONS 53 

much more desirable that there should be healthy coinpetition be- 
tween emplo3^ees than that there should be a contest between 
industrial concerns. It is one of the chief evils of the present 
industrial regime that the chief competition should be between work- 
ing men and women in seeking employment. Positions once se- 
cured, competition largely ceases. The employees become merged 
in a large body of workers, and have little direct personal interest 
in the work which they performi. Even in those private industries 
in which the wages paid are proportionate to the amount of work 
done, the individual is not permitted as a rule tO' exhibit his full 
degree of skill. In many cases it is an unwritten law among such 
workmen that certain maxima of piece work shall not be exceeded, 
even by the most able and skillful, for the very satisfactory reason 
that if such maxima are more than occasionally exceeded the price 
paid per piece by the employers will inevitably be reduced, with the 
result, of course, that the most efficient will henceforth receive no 
more than they would have earned under the old scale, while all 
the remainder will receive less. 

If, then, we can have a governmental control in which earnings 
are graded according- to the amount and character of the work done, 
and in which a careful inspection is maintained for the purpose of 
detecting and rewarding merit and demerit proportionally, either 
by increase or decrease of wages, or by changing the character of 
work required, then a truer and more beneficial competition will 
be maintained than the old competition between concerns which the 
governmental monopoly will destroy. All we wish to point out is 
that the application of the competitive principle would not neces- 
sarily exclude governmental ownership and operation. 

32. Competition and Selfishness. 

BY S. J. CHAPMAN. 

I must reiterate, in order that there may be no mistake, that 
modern analytical economics neither assumes nor advocates selfish- 
ness. But without relegating sentiment tO' Saturn, we may hold 
that the afifections do not directly enter into most business transac- 
tions. "Oh 'tis love, 'tis love, that makes the world go- round," 
asserted the duchess in Alice in Wonderland. "Somebody whis- 
pered," said Alice, "that it's done by everybody minding his own 
business." However, among the impulses which are the motive 
power of business activities, the affections may play a large part 
indirectly. A man may work his best to make as much as possible 
in the interests of his family or friends, or even for philanthropic 



54 



READINGS IN ECONOMIC PROBLEMS 



purposes. Finally it must not be imiagined that, in the absence o£ 
altruistic motives, a man who works his hardest for success must 
be sordid. The passion of great business leaders is commonly quite 
other than that of the miser. Because money provides the counters 
which measure commercial triumphs, we are apt to go astray in 
our analysis. They who play cards for cowries are not mastered 
by a passion for cowries. 

33. Competition and Social Service. 

BY J. A. HOBSON. 

The consciousness of social service as a stimulus to work is not 
inconsistent with competition. The artist who' labours to express 
himself to others can only succeed on condition that he keeps before 
his mind these others : mere self-expression is not art at all. Though, 
therefore, the artist may be working for gain, and may be conscious 
of his competitors, the interest in his work and his capacity to do it 
involves some regard for the public. The same applies alsO' to the 
artisan so far as his manipulation of material involves conscious 
regard for its utility, and therefore consideration of the needs of 
the consumers. So, too, with the professions ; however keen the 
rivalry of professional men to iget employment may be, the nature 
of the work they do' involves the detailed operation of disinterested 
motives leading them to value their work for its real social utility 
rather than for the gain it brings them-. This is the well-recog- 
nised difference between a profession and a trade, which has always 
underlain the lower esteem in which tradesmen and the trading 
spirit have been held. It is, indeed, in commerce, and primarily in 
retail trade, rather than in manufacture or any branch of production, 
that the ethics of competition appears to do most damage, the rea- 
son, of course, being that in the dealing processes antagonism of 
human interests is sharpest, and the conscious energy of dealers is 
most confined to the pursuit of personal profit. In most manufac- 
tures, though the employer is not in business "for his health," but 
primarily to make profits, the skill and intricacy of the practical oper- 
ations which he conducts absorb much of his attention, and pride in 
the character of his business and the equality of its products digni- 
fies his conduct. Just in proportion as he is not forced to concen- 
trate his thought and feeling upon the art of getting business away 
from other firms and pushing his clainns against theirs in the market, 
does his work take conscious shape in his mind as the social func- 
tion which it really is. Just in proportion as the competitive activi- 
ties assume prominence is he compelled tO' sink this social feeling. 



FUNDAMENTAL ECONOMIC INSTITUTIONS 



55 



to push his goods in conscious rivalry with those of other firms, 
and to cultivate those arts of sweating, adulteration, and deceit, 
which seem necessary to enable him to sell goods at a profit. 

Such considerations indicate that the moral economy of compe- 
tition is not simple or uniform : where it takes shape in the rivalry 
of Euripides, Aeschylus and Sophocles to win the favour of an 
Athenian public for their respective dramas it may act as a direct 
incentive of the highest form of social wealth ; where it operates 
among strug-gling grocers in the same street it may mean starved 
assistants, short weights and doctored goods. 

34. State Determination of the Plane of Competitive Action. 

BY HENRY C. ADAMS. 

What is meant by saying that unguarded competition tends to 
lower the moral sense of a business commiunity? Wherever the 
personal element of a service comes pro^minently into* view, and the 
character of the agent rather than the quality of goods is forced 
into prominence, probity has its market value and honesty may be 
the best policy. But in the commercial world as at present organ- 
ized, where the producer and the consumer seldom come into per- 
sonal contact, the moral arrangements followed in the process of 
production are not permitted a moment's thoiight. All that is con- 
sidered by the purchaser is the quality and the price of the goods. 
Those that are cheap he will buy, those that are dear he will reject; 
and in this manner he encourages those methods of production that 
lead to cheapness. 

There are of course exceptions to this rule. But these exceptions 
do not vitiate the rule laid down. There must be substantial uni- 
formity in the methods of all producers who continue in competi- 
tion with each other. Each man in the business must adopt those 
rules of management which lead toi low prices, or he will be com- 
pelled tO' quit the business. And if this cheapness, the essential re- 
quisite of business success, be the result of harsh and inhuman meas- 
ures, or if it lead to misrepresentation and dishonesty on the part of 
salesmen or manufacturers, the inevitable result must be that harsh- 
ness and inhumanity will become the essential condition oi success, 
and business men will be obliged to live a dual existence. 

In his excellent work upon "The Philosophy of Wealth," Profes- 
sor Clark calls attention toi the fact that the "tribal conscience," 
which was sensitive to the finer qualities of human character, has 
given way toi the "inter-tribal conscience," which tolerates mercan- 
tile contention and winks at the tricks of trade. In making: use of 



56 READINGS IN ECONOMIC PROBLEMS 

such expressions he probably has reference to the singular fact that, 
while society existed in the tribal state, or was controlled by the 
governments of local trading guilds, competition was inoperative 
so far as the members of the same tribe or city were concerned ; but 
in case of trade between members of different tribes, or in the es- 
tablished market-places where citizens of various towns came to- 
gether, we find the higgling of the market so characteristic of com- 
petitive transactions. At the present time, however, these local reg- 
ulations have given way before the extension of the national idea, 
and, instead of the old mercantile code of local trade being main- 
tained for all members of the same nation, even local trade has been 
brought under the direction of the rule which formerly applied 
only to inter-tribal commerce. 

The fact upon which we insist at this point is that an isolated 
man is powerless tO' stemi the tide of prevalent custom, and that in 
many lines of business those men whose moral sensibilities are the 
most blunted exercise an influence in determining prevalent cus- 
tom altogether out of proportion to their importance as industrial 
agents. Suppose that of ten manufacturers nine have a keen appre- 
ciation of the evils that flow from protracted labor on the part of 
women and children ; and, were it in their power, would gladly pro- 
duce cottons without destroying family life, and without setting in 
motion those forces that must ultimately result in race-deterioration. 
But the tenth mian has no such apprehensions. The claims of family 
life, the rights of childhood, and the maintenance of social well-be- 
ing, are but words to him. He measures success wholly by the rate 
of profit. If now the state stand as an unconcerned spectator, the 
nine men will be forced to conform to the methods adopted by the 
one. Their goods come into competition with his goods, and we 
who purchase do not inquire under what conditions they were man- 
ufactured. In this manner it is that men of the lowest character 
have it in their power to give the moral tone to the entire business 
community. One of the most common complaints of business men 
is that they are obliged to conform to rules of conduct which they 
despise. It is a necessary result of a competitive society that the 
plane of business morals is lower than the moral character of a 
great majority of men who compose it. 

But what, it may be asked, can the state do in the premises? 
The state has done much and can do more. That code of enact- 
ments known as "facto^ry legislation"' is addressed tO' just this evil 
of competitive society, and it only remains for us to formulate for 
this code an economic defense. The general rule laid down for the 
guidance of state interference in industries was that society should 



FUNDAMENTAL ECONOMIC INSTITUTIONS 57 

be secured in the benefits while secured against the evils of competi- 
tive action. When the large body of competitors agree respecting 
some given method of procedure, but are powerless to follow it 
because a few men engaged in the same line of business refuse to 
conform to the proposed regulations, it becomes the province of the 
state to incorporate the wish of the majority in some practical law. 
In this manner there is established a legal plane of competition 
higher than that which could be maintained in the absence of legal 
enactment. This is no curtailment of competitive action, but a de- 
termination of the manner in which it shall take place. If the law 
says that no child shall be employed in factories, the plane of com- 
petition is raised to the- grade of adult labor. If married women 
are refused employment, the nature of competition is again changed, 
but competition is not restricted. As the result of such legislation 
some of the evils of the present system would disappear, while all 
the benefits of individual action would yet be conserved to society. 

This, then, is one defense of interference on the part of the state. 
It lies wathin its proper functions to determine the character of 
such competitive action as shall take place. There must be con- 
formity of action between competitors, and the only question is 
whether the best or the worst men shall set the fashion. One can- 
not be neutral with regard to this question. No vote at all is a 
negative vote ; and a vote in the negative is as positive in its results 
as one in the affirmative. Should the state insist on following the 
rule of non-interference, society cannot hope to adjust its productive 
processes to the best possible form of organization. 

We have all of us, doubtless, heard the claim that the state is a 
moral agency ; that it is imposed with moral duties. For a number 
of years after this phrase came to my notice, it presented to my 
mind no distinct meaning. It seemed to me to cover the philan- 
thropic purpose of shallow intellects, and to be most frequently 
used by men who knew not the way of guile nor anything else for 
certain. But properly understood this phrase contains a deep truth 
of social philosophy. It does not mean that the law is a schoolmas- 
ter coercing men to be good, nor that it is the depository of a social 
ideal to be admired ; but, on the contrary, it means that the law is an 
agency for the realization of the higher ideals of men by guarding 
them from that competition which would otherwise force them to a 
lower plane of action, or else force them out of business. In per- 
forming such a duty the state performs a moral function, for it reg- 
ulates competition to the demands of the social conscience. Under 
the guiding influence of such a thought the immediate interests of 



58 READINGS IN ECONOMIC PROBLEMS 

the individual may be made to coincide, in some degree, with the 
fundamental interests of society, and thus, by disregarding- the dog- 
ma of laissez-faire, the fundamental purpose of those formulating 
the doctrine is in part realized. 



B. THE LEGAL SYSTEM. 
35. The Economic Foundation of Law. 

BY ARCHELIvE; I.ORIA. 

Changes in the prevailing economic conditions necessarily in- 
volve corresponding changes in the law. The history oi the law 
furnishes us with clear and definite demonstration of that fact. Ger- 
manic law founded property rights upon the family, while primi- 
tive Roman law accorded such rights to the individual ; but in the 
primitive Roman law there are also traces of the earlier family com- 
munity. That so striking an analogy should exist in the legal systems 
of two peoples so proioundly different and so widely separated is a 
highly significant fact and one worthy of serious consideration ; on 
the one hand because it reverses the theory that the law is an emana- 
tion of the national conscioiusness, and on the other because it shows 
that the law necessarily depends upon existing economic conditions. 
The Romans and the primitive Germans were profoundly different 
in manners and race, and lived under different climatic conditions. 
Between these twO' peoples there was nothing in comimon beyond 
the identity of their economic conditions ; or, to put it more defi- 
nitely, there was nothing in commion between them except identical 
territorial conditions which irresistibly impelled them to adopt iden- 
tical economic constitutions. It is perfectly evident that this profound 
analogy in the legal systems of these two peoples could not have 
been the product of conditions wherein they differed, and must, 
accordingly, come from the one element common to them both, their 
economic system. 

36. Law in Political Economy. 

BY JOHN R. COMMONS, 

The place of Law in Political Economy is a subject which has 
received from English economists no attention at all commensurate 
with its far reaching importance. The English economists have 
taken the laws of private property for granted, assuming that they 
are fixed and immutable in the nature of things and therefore 
need no investigation. But such laws are changeable — they differ 



FUNDAMENTAL ECONOMIC INSTITUTIONS 59 

for different peoples and places, and they have a profound influence 
upon the production and distribution of wealth. 

The miodern economic system depends upon the independent en- 
terprise of free individuals as contrasted with the public manag^e- 
ment of business by the government or the community. The private 
enterprise takes the form either of the independent action of single 
individuals or the associated activities of individuals in partnerships 
or corporations. The decisive characteristics of industry under the 
regime of private enterprise are Division of Labor, Exchange of 
Products, Credit, Self-interest, and Comipetition. Every one of 
these characteristics involves the profound dependence of man upon 
his fello'wmen. Social relations are growing more and more im- 
portant. In order that industry may be carried on at all under such 
complex relations, there must be a definite understanding by every 
individual as tO' wbat he may expect from others and what he 
must do in turn for others. Nothing can be left to chance, 
force, or fraud. Consec[uently there must be somewhere a supreme 
authority with power to define and enforce the rights and duties of 
individuals. It is not always as important that these rights and 
duties be based upon ideas of justice as that they be certain. There 
must be no roonij for the arbitrary rulings of individuals. This indi- 
cates the necessity for law and ,government. Thus there are in 
society two lines of ecooo-mic activity, the voluntary activity oi indi- 
viduals and associations, and the compulsory activity of government. 

37. Conflict of Social Welfare and Individual Liberty. 

BY IvUCIUS POLK MC GEHEE. 

Many cases involve a conflict of interest, as viewed by the legis- 
lative mind, between the welfare of the State as a whole and the 
untrammelled liberty of certain classes in the community. The 
question O'f the policy of the State in dealing with such conflicts is 
an exceedingly difficult one and requires the application of broad 
principles of public policy and economic theory to* practical legisla- 
tion. These principles are not yet so firmly established that our 
courts may mark exactly the point at which State interference 
should in all cases cease and the freedom of the individual have 
unrestricted sway. The rapid developinient of industry bringing 
into play new forms of power from wealth and combination, and 
the increasing complexity of civilization have already rendered 
necessary restrictive legislation which would have seemed intoler- 
able tO' a generation nurtured in the legislative theories of Bentham.. 
Enlightened public opinion, as reflected by our legislatures and 



6o READINGS IN ECONOMIC PROBLEMS 

courts, has reacted from the strict doctrine of laissez faire, and we 
cannot say that a further abandonment of that position may not be 
advisable. It is of the utmost importance, then, not to give to the 
broad and simple phrases of the Constitution in the enumeration 
of fundamental rights so rigid an interpretation as will hamper the 
legislature in fashioning remedies for apparent evils and abuses. 
Or, in the anxiety to preserve individual liberty in theory, the courts 
may sanction a state of practical oppression. In, discussing the atti- 
tude of the Supreme Court of the United States toward State legis- 
lation, the court has said, "While the courts must exercise a judg- 
ment of their own, it by no means is true that every law is void 
which may seem to the judges who pass upon it excessive, unsuited 
to its ostensible ends, or based upon conceptions of morality with 
which they disagree. Considerable latitude must be allowed for 
difference of view, as well as for possible conditions which the court 
can know but imperfectly, if at all. Otherwise, a constitution, in- 
stead of embodying only relatively fundamental rules of right, as 
generally understood by all English-speaking communities, would 
become the partisan of a particular set of ethical or economic opin- 
ions which by no means are held semper, uhique, et ah omnibtis."'^ 

38. Uniformity in Law. 

BY FRANK J. GOODNOW. 

The increase of centralization of economic conditions due par- 
ticularly to improvements in transportation and the consequent en- 
largement of the area over which commercial transactions extend, 
and the increase in the mobility of the population, have made the need 
for uniformity in the law more apparent. While economic central- 
ization has thus made uniformity in the law more necessary than it 
once was, influences have been at work which have actually pro- 
duced diversity in the law rather than increased uniformity. The 
greater number of courts of last resort which has followed upon 
the increase in the number of states, together with the decreasing 
authority of the decisions of the English courts, has been one of 
these influences. Another has been the great increase of statute 
law. Legislatures of different states, not being controlled by the 
necessity of precedent, have, where it seemed necessary tO' change 
the law, amended it in different ways. The result has been that, 
although economic conditions have been centralized during the cen- 
tury and a 'half of our national life, our law has become less uni- 
form than it was. 

* Otis vs. Parker, 187 U. S. 608. 



FUNDAMENTAL ECONOMIC INSTITUTIONS 6i 

C. PRIVATE PROPERTY. 
39. A Definition of Private Property. 

BY RICHARD T. KLY. 

Private property is an exclusive right, but never an absolute 
right. Private property is a growth, changing both with respect to 
the number of things to- which it extends, and with respect to the 
privileges which it carries with it. Legal codes will be searched in 
vain foir an unlimited right of private property. Should a definition 
of private property be found whicii appears toi be absolute, limita- 
tions will be found elsewhere in the code. These limitations, when 
carefully examined, all mean one thing; namely, that private prop- 
erty has a social side. But this is not all. An examination of the 
nature and the growth of private property and oi its treatment by 
civilized nations shows that, in the case oi conflict between the 
social and the individual side, the social side is dominant and the 
individual claims must yield. Private property is maintained for so- 
cial purposes. 

40. The Right of Property. 

BY JOHN AUSTIN. 

Whoever has a right of property may apply the subject of his 
right to any purpose or use which does not amount to a violation of 
any right in another, ot to a breach of any duty lying on himself. 
And it is only in that negative manner that the extent of the power 
of user imported by the right can possibly be determined. 

Property or dominion is applicable^ to any right which gives the 
entitled party an indefinite power or liberty of using or dealing with 
the subject. But property, as thus understood, is susceptible of vari- 
ous modes ; that is to- say, the limitations or restrictions to* that power 
or liberty, which spring from the rights of others and from duties 
incumbent upon himself, may vary to infinity. 

But the possible modes of property are infinite and though the 
indefinite power of user is thus restricted, more or less, there is 
in every system of law some one mode of property in which the re- 
strictions to the power of user are fewer than in others : or, chang- 
ing the expression, there is some one mode of property in which 
the power or liberty of indefinite user is more extensive than in 
others. And to- this mode of property the term dominium, prop- 
erty or ownership, is preeminently and emphatically applied. 

It follows from what has preceded, that neither the right of prop- 
erty, which imports the largest power of user, nor any of the rights 



62 READINGS IN BCONOMIC PROBLEMS 

of property which are modes or miodifications of it can be defined 
exactly. For property or dominion ex vi termini is jus in rem im- 
porting an indefinite power of user. This indefiniteness is of the 
very essence of the right and impHes that the right cannot be deter- 
mined by exact and positive circumscription. The definition of the 
right of property Hes throughout the corpus juris, and imports a 
definition of every right or duty which the corpus juris contains. 

41. Property and the Distribution of Wealth. 

BY JOHN STUART MILL. 

The distribution of wealth is largely a matter of human institu- 
tions. The things once there, mankind, either individually or col- 
lectively, can dO' with them as they like. They can place them at 
the disposal of whomsoever they please, and on whatsoever terms 
they please. Further, in the social state, in every state except total 
solitude, any disposal whatever can take place only by the consent 
of society, or rather of those who' dispose of its active force. Even 
what a person has produced by his native toil, unaided by anyone, 
he cannot keep unless by the permission of society. Not only can 
society take it from him but individuals could and would take 
it fromi him if society only remained passive; if it did not 
interfere en masse or employ and pay people for the purpose 
of preventing him fromi being disturbed in its possession. The dis- 
tribution of wealth, therefore, depends on the laws and customs of 
society. The rules by which it is determined, are what the opinions 
and the feelings of the ruling portion of the community make them, 
and are dififerent in the different ages and countries ; and might be 
still more different, if mankind sO' chose. 

The institution of property, when limited to its essential ele- 
ments, consists in the recognition, in each person, of the right tO' the 
exclusive disposal of what he or she has produced by his own exer- 
tions or received by gift or fair agreement without force or fraud, 
from those whoi produced. The foundation of the whole is the right 
of producers tO' what they themselves have produced. It includes 
then the freedom of acquiring by contract. The right of each to 
what he has produced implies a right to what has been produced by 
others, if obtained by their free consent ; since the producers must 
either have given it fromi good will, or exchanged it for what they 
esteemed an equivalent. To prevent them from doing so would 
be to infringe their right of property in the things that they them- 
selves have produced. 

The question arises whether the reasons on which the institution 



fUNDAMBNTAL ECONOMIC INSTITUTIONS 63 

of property rests are applicable to all the things in which a right 
of exclusive ownership is at present i-ecognized ; and if not upon 
what grounds the recognition is defensible. The essential prin- 
ciple of property being to assure to all persons what they have pro- 
duced by their labor or abstinence, this principle cannot apply to 
what is not the product of such labor or abstinence, the raw ma- 
terial of the earth. The land is not the produce of industr}^ ; most 
of its valuable qualities are. Considerable labor is often required 
at the commencement to clear the land for cultivation. In many 
cases, even when cleared, its productiveness is wholly the effect of 
labor and art. The fruits of this industry cannot be reaped in a 
short period. The labor and industry are immediate, the benefit 
is spread out over many years, perhaps all future time. The holder 
will not incur this labor and outlay when strangers and not himself 
will be benefited by it. If he undertakes such improvements he 
must have a sufficient period before himi in which to profit by them ; 
and there is nO' way so sure of always having a sufficient period as 
when his tenure is perpetual. 

These are the reasons in an economical sense which form the 
justification of property in land. When the sacredness of property 
is talked about, it should always be remembered that any such sacred- 
ness does not belong in the same degree to landed property. No 
man made the land. It is the general inheritance of the whole, spe- 
cies, its appropriation is wholly a question of general expediency. 
It is some hardship to be born into the world and tO' find all nature's 
gifts previously engrossed, and no place left for the newcomer. To 
reconcile people to this after they have once admitted to their minds 
the idea that any moral right belongs tO' them as human beings, it 
will always be necessary to^ convince themi that the exclusive appro^ 
priation is good for mankind on the whole, themselves included. 
Landed property is felt even by its most tenacious defenders to* be a 
dififerent thing from other property ; and men have tried to reconcile 
it, at least in theory, tO' their sense of justice by endeavoring to 
attach to it certain duties, and erecting it into^ a sort of magistracy 
either moral or legal. The claim of the landowners tO' land is al- 
ways subordinate to the general policy of the state. 

42. The Economic Foundation of Property. 

BY F. W. TAUSSIG. 

What can be said in justification of the inheritance of property, 
which acts so powerfully to maintain inequality? The ground on 
which inheritance is to be defended is frankly utilitarian. In a 



64 . READINGS IN ECONOMIC PROBLEMS 

society organized on the basis of property inheritance is essential to 
the maintenance of capital. 

It may be open to question how far inheritance is necessary for 
the first steps to accumulation. The motives that lead to money 
making and to the initial stages of saving and investment are vari- 
ous, including not only the safeguarding of the future for one's 
self and dependents, but social ambition, the love of distinction, the 
impulses to activity and to domination. But, for sustained accumu- 
lation and permanent investment, the main motives are domestic 
affection and family ambition. The bequest of a competence or a 
fortune, though often of dubious advantage to descendants, is a 
mainspring for its upbuilding by the ancestor. If we were to put 
an end to inheritance, decreeing that all estates should escheat to 
the public after death, the owner would commonly dissipate his 
property. One of the motives for its first acquisition would be gone, 
and certainly the chief motive for its maintenance. Why accumu- 
late and invest for the benefit of the community in general? 

Inheritance in other words is an indispensable part of the insti- 
tution of property. So long as the community relies on the accumu- 
lation by individuals and on the ownership and management by 
them for the supply of its material equipment, it must give scope 
to the motives that lead to the formation and maintenance of capital 
through the action of these individuals. 

What now of the ulterior question, the basis of the whole regime 
of private property? As the institution of inheritance can be sus- 
tained only on a basis of utilitarianism, so can that of property in 
general. The utilitarian reasoning may be summarized as follows : 
Men will not labor steadily and effectively except in their own be- 
half. Labor is irksome, the sense of common interest weak. Labor 
will not be exerted continuously and vigorously except for individ- 
ual benefit. It is strenuous and well directed in proportion to the 
expected returns. 

Inequality arises even under the simplest conditions from the 
unequal endowments of men. This is accentuated in a society char- 
acterized by the division of labor; for, in such a society, man is led 
to do what brings indirectly the largest returns. Competition and 
self mterest thus not only promote the vigor of labor, but the effect- 
ive organization of society. Inequality becomes more marked as 
increasing complexity gives play to the very varying abilities. Wide 
variations thus arise in earnings, possessions, available surplus. The 
essence of capital is surplus. This is utilized by those who see 
time-saving ways of directing labor with effect. Sustained accumu- 
lations and investment on a large scale will not be made unless there 



PUNDAMBNTAL ECONOMIC INSTITUTIONS 65 

is an inducement. The phenomenon of interest occurs. Like inter- 
est inheritance operates as an indispensable stimulus to the saving of 
private means and the increase of social capital. 

Out of this accumulation a leisure class emerges. Although the 
immediate effect of the idleness of a fraction of the community is 
obviously to lessen the total available labor force, the prospect of 
being a member of the leisure class has proved a wonderful spur to 
effective exertion and permanent investment. The hope of privi- 
leged position for one's self or one's kin has been the main motive 
force for the material progress of society. This reasoning would 
lead to the conclusion that desert on the part of the members of 
this leisure class is not necessary to^ justify its existence. Its posi- 
tion of ease and comfort is a bait to stimulate ambition and accumu- 
lation. Direct service by the survivors and descendants of fortune- 
builders would seem to be immaterial; but it is obvious that the jus- 
tification of inequality and all its consequences becomes more effect- 
ive when the leisure class is of service directly as well as indirectly. 
Though the mere existence of a capitalistic aristocracy operates to 
spur ambition and conserve capital, its position is immensely strong- 
er if the individual members contribute actively tO' the general well- 
being, through continued industrial leadership, advancement of sci- 
ence, literature, and art, and high-minded public service. 

Such is the analysis of the foundations on which the institution 
of property rests. It applies to the sound core of the system, not 
to all its excrescenses. The justificatory account just given would 
be a fairly accurate description o<i what has actually happened in 
few communities. The wrongs of the past perpetuated by the insti- 
tution of inheritance weigh heavily on almost all of the modern 
world. The maintenance of things as they stand is dependent in a 
very large degree on the principle of vested interests, the repeated 
sales and transfers of properties and rights, and the impossibility of 
probing far into the past. As with land and urban sites, so it is 
with almost all property. The community has maintained for cen- 
turies the right of property ; it has encouraged men to buy and sell 
on that basis, to invest and to shift investments, to commit them- 
selves irrevocably. It cannot uproot the past. 

D.. FREEDOM OF CONTRACT. 

43. Freedom of Contract and Individual Liberty. 

As in our intercourse with our fellowmen certain principles of 
morality are assumed to exist, without which society would be im- 
possible, so certain inherent rights lie at the foundation of all action, 



66 READINGS IN ECONOMIC PROBLEMS 

and upon a recognition of these alone can free institutions be main- 
tained. Among these inaHenable rights of individuals is the right to 
pursue happiness, by which is meant the right to pursue any lawful 
business or vocation in any manner, not inconsistent with the equal 
rights of others, which may increase their prosperity or develop their 
faculties so as to give them their highest enjoyment. 

The common businesses and callings of life, the ordinary trades 
and pursuits, which are innocuous in themselves, and have been 
followed in all communities from time immemorial, miust, therefore, 
be free in this country to all alike on the same conditions. The 
right to pursue them, Avithout let or hindrance, except that which 
is applied to all persons of the same age, sex, or condition, is a dis- 
tinguishing mark of the citizens of the United States, and an essen- 
tial element of that freedom which they claim as their birthright. 

In this country it has seldom been held, and never in so odious 
a form as that here claimed, that an entire trade or business could 
be taken fro^m citizens and vested in a single corporation. Such 
legislation has been regarded everywhere else as inconsistent with 
civil liberty. 

44, Freedom of Contract and the General Welfare. 

Under the common law the grounds on which contracts in re- 
straint of trade were declared invalid were that they were contrary 
to public poilicy. But when it becomes necessary to consider the 
grounds of public policy, in the determination of a case, it is well to 
bear in mind the saying, "Public policy is a very unruly horse, and 
when you once get astride it you can never tell where it will carry 
you." Public policy changes with the changing conditions of the 
times. It is hardly tO' be expected that a people who are transacting 
business under the coimplex conditions of today entertain the same 
ideas as to what is conducive to business and commercial transactions 
as those of the last century. In considering this subject the standard 
for the determination of public policy must be found in the laws, 
constitutions and judicial decisions of the country. 

45. Static Assumptions of Contractual Freedom. 

BY ROSCOE POUND. 

"The right of a person to sell his labor," says Mr. Justice Har- 
lan, "upon such termis as he deems proper is, in its essence, the same 
as the right of the purchaser of labor toi prescribe the conditions 
upon which he will accept suc'h labor from the person offering to 



FUNDAMENTAL ECONOMIC INSTITUTIONS 67 

sell it. So' the right of the employe to quit the service of the em- 
ployer, for whatever reason, is the same as the right of the employer, 
for whatever reason, to dispense with the services of such employe. 
In all such particulars the employer and the employe have equality 
of right, and any legislation that disturbs that right is an arbitrary 
interference with the liberty of contract, which no g'overnment can 
legally justify in a free land."* With this positive declaration of a 
lawyer, the culmination of a line oi cases now nearly twenty-five 
years old, a statement which a recent writer on the science of juris- 
prudence has deemed so fundamental as to deserve quotation and 
exposition at an unusual length, let us compare the equally positive 
statement of a sociologist : "Much of the discussion about 'equal 
rights' is utterly hollow. All this ado about the system of contract 
is surcharged with fallacy." 

To everyone acquainted with the facts at first hand the latter 
statement goes without saying. Why, then, do the courts persist 
in the fallacy? Why do so mau)^ of them force upon legislation an 
academic theory of equality in the face of practical inequality ? 
Why do we find a great and learned court in 1908 taking a long 
step into the past of dealing with the relations between employer and 
em.ploye in railway transportation, as if the parties were individ- 
uals, as if they were farmers haggling over the sale of a horse? 
Why is the legal conception of the relation of employer and employee 
so at variance with the common knowledge of mankind? Surely 
the cause of such doctrine must lie deep. Let us enquire then what 
these causes are and how they have operated to bring about the 
present state of the law of freedom of contract. 

There is no doubt that the theory of "natural rights" is at the 
basis of miOdern conceptions of freedom of contract. This began 
as a doctrine of political economy, as a phase of Adam Smith's doc- 
trine which we commonly call laissez faire. It was propounded as 
a utilitarian principle of politics and legislation by Mill. vSpencer 
derived it from his formula of justice. In this way it became a chief 
article in the creed of those who sought toi minimize the functions 
of the state, to insist that the most important of its functions was 
to enforce by law the obligations created by contract. This theory 
has shown itself present in both legislation and judicial decisions. 
As a consequence the doctrine of liberty of contract is bound up in 
the decisions of our courts with a narrow view as to- what consti- 
tutes special or class legislation, that greatly limits effective law 
making. For one thing there is the doctrine that apart from consti- 

* Adair vs. U. S., 208 U. S. 161. 



68 READINGS IN ECONOMIC PROBLEMS 

tutional restrictions there are individual rights resting on a natural 
basis, to which the courts must give effect, beyond the control of 
the State. "In the judicial discussions of liberty of contract this idea 
has been very prominent. One court reminds us that natural per- 
sons do not derive their right to contract from the law.* Another 
court in passing adversely upon legislation against company stores, 
says any classification is arbitrary and unconstitutional unless it pro- 
ceeds on "the natural capacity of persons to contract."! Another, in 
passing on a similar statute, denies that contractual capacity can be 
restricted except for physical or mental disabilities.! Another holds 
that the legislature cannot take notice of the de facto subjection of 
one class of persons to another in making contracts of employment 
in certain industries, but must be governed by the theoretical jural 
equality. § 

Not only, however, is natural law the fundamental assumption 
of our law and legal philosophy, but we must not forget that it is 
the theory of our bills of rights. Not unnaturally the courts have 
clung to it as being the orthodoiX theory of constitutions. But the 
fact that the framers held that theory by no means demonstrates 
that they intended to impose the theory on us for all time. They 
laid down principles, not rules, and rules can only be illustrations of 
principles so long as the facts and opinions remain what they were 
at the time when the rules were announced. Forgetfulness of this 
latter fact and an intense zeal for natural rights theory has led to a 
desire to extend this freedom as far as possible and to limit as much 
as possible whatever would tend tO' interfere with this, such as the 
number and kinds of incapacities which would justify a restraint of 
this liberty. The decisions of the courts plainly reveal this. They 
agree that the term "liberty" is broader than Coke's use of it, that 
the fact that Coke confined it to- freedom of physical motion and 
locomotion does not exclude a broader interpretation today. Yet 
the same courts that recognize that liberty must include more today 
than it did as used in Coke's Second Institute, lay it down that the 
incapacities are to remain what they were at the common law, that 
new incapacities of fact, arising out of present industrial situations, 
may not be recognized by legislation. Restraints upon that freedoin 
must find some justification in the existence of like limitations recog- 
nized at the old common law. 

This appears perhaps no more clearly than in the efforts of the 

* S8 Ark. 407. 
fiiS Mo. 307. 
t22 W. Va. 188. 
§ 61 Kas. 140. 



FUNDAMENTAL ECONOMIC INSTITUTIONS 69 

courts to reconcile the existence of usury laws with their notion of 
liberty of contract. As was said in 113 Pa. St. 427, "The right to 
regulate the rate of interest existed at the time the constitution was 
adopted, and cannot, therefore, be considered either an abridgment 
or restraint upon the rights of the citizen, guaranteed by the con- 
stitution. The power to pass usury laws exists by immiemorial us- 
age ; but such is not the case with such acts as we are considering." 
That narrOiW assumptions underlie conceptions of contractual cap- 
acities also receives exemplification in connection with judicial dis- 
cussions O'f usury laws. For instance in Frorer vs. People, 141 111. 
171, the court said, "Usury laws proceed upon the theory that the 
lender and the borrower of money do' not occupy toward each other 
the same relations of equality that parties do in contracting with 
each other in regard to^ the loan or sale of other kinds O'f property, 
and that the borrower's necessities deprive him of freedom in con- 
tracting and place him at the mercy of the lender, and such laws 
may be found on the statute books of all civilized nations of the 
world, both ancient and modern." It does not even seem to have 
occurred to Justice Scholfield that the necessities of the miner or 
factory employe might impair his freedom of contract as well. And 
instances might be multiplied, showing the purely individualistic 
character of all natural law theories, and the legal decisions based 
upon them. 

46. Individualism and Freedom of Contract. 

BY THORSTEIN B. VEBLEN. 

« 

The movement of opinion on natural-rights grounds converged 
to an insistence on the system of natural liberty, so-called. But this 
insistence on natural liberty did not contemplate the abrogation of 
all conventional prescription. "The simple and obvious system of 
natural liberty" meant freedom from restraint on any other pre- 
scriptive ground than that afforded by the rights of ownership. In 
its economic bearing the* system of natural liberty meant a system 
of free pecuniary contract. "Liberty does not mean license;" which 
in economic terms would be transcribed, "The natural freedom of 
the individual must not traverse the prescriptive rights of property." 
Property rights being included among natural rights, they had the 
indefeasibility which attaches to natural rights. Natural liberty 
prescribes freedom to buy and sell, limited only by the equal free- 
dom of others to buy and sell ; with the obvious corollary that there 
must be no interference with others' buying and selling, except by 
means of buying and selling. 



70 READINGS IN ECONOMIC PROBLEMS 

Presently, when occasion arose in America, the metaphysics of 
natural liberty was embodied in set form in constitutional enact- 
ments. It is, therefore, involved in a more authentic form and with 
more incisive force in the legal structure of this community than 
in that of any other. Freedom of contract is the fundamental tenet 
of the legal creed, so to speak, inviolable and inalienable ; and within 
the province of law and equity no one has competence to penetrate 
behind this first premise or to question the merits of the natural- 
rights metaphysics on which it rests. The only principle which may 
contest its primacy in civil matters is the vague "general welfare" 
clause, and even this can effectively corniest its claims only under 
exceptional circumstances. Under the application of any general 
welfare clause the presumiption is, and always must be, that the prin- 
ciple of free contract be left intact so far as the circumstances will 
permit. The citizen may not be deprived of life, liberty, or property 
without due process of law, and the due process proceeds on the 
premise that property rights are inviolable. In its bearing upon eco- 
nomic relations between individuals this comes to mean, in effect, not 
only that one individual or group of individuals may not legally 
bring any other than pecuniary pressure to bear upon another in- 
dividual or group, but also that pecuniary pressure cannot be barred. 
Now through gradual change of the economic conditions, this 
conventional principle of unmitigated and inalienable freedom of 
contract began to grow ohsolete from the moment when it was fairly 
installed ; obsolescent, of course, not in point of law, but in point 
of fact. The machine process has invaded the field. The standard- 
ization and the constraint of the system of machine industry differs 
from what went before it in that it has no conventional recognition, 
no metaphysical authentication. It has not become a legal fact. 
Therefore it neither can nor need be taken account of by the legal 
mind. It does not exist de jure but de facto. 

The "natural," conventional freedomi of contract is sacred and in- 
violable. The de facto freedom of choice is a matter about which 
the law and the courts are not competent to enquire. By force of 
the concatenation of industrial processes and the dependence of 
men's comforts or subsistence upon the orderly working of these 
processes, the exercise of the rights of ownership in the interests of 
business may traverse the de facto necessities of a group or, class; it 
may even traverse the needs of the community at large, for ex- 
ample, in the conceivable case of an advisedly instituted coal famine; 
but since the necessities or comforts of livelihood cannot be formu- 
lated in terms of the natural freedom of contract, they can, in the 
nature of the case, give rise to no cognizable grievance and find no 
legal remedy. 



FUNDAMENTAL ECONOMIC INSTITUTIONS 71 

E. CREDIT. 
47. The Social Importance of Credit. 

BY WII.LIAM ROSCHF^R. 

Credit is the power of disposition over the goods of another 
voluntaril}^ granted in consideration of the mere promise of the 
counter- value. As Franklin says : A good pay is master of another 
man's purse. Hence whoever would obtain credit must be believed 
to possess the ability to fulfill his promise. Personal credit, par- 
ticularly for long periods, is rather uncertain. Civilized nations on 
that account prefer the greater security and the absence of care 
which accompany non-personal credit. 

Credit grows in importance with an advance in civilization, 
especially credit intended for productive purposes. This is a conse- 
quence of the greater division of labor which causes to be put on 
the market products which come to have a value only some time in 
the future. And, indeed, as the world advances and civilization 
^rows, it becomes much easier to forecast the future with certainty. 
The future, also, then becomes a source of solicitude, and fixed cap- 
ital, as a consequence, plays a part which grows daily more import- 
ant. 

As regards the effects o^f credit, it is as powerless directly to 
produce new capital as is the division of labor to^ produce new work- 
men. But credit facilitates the transmission of the elements of pro- 
duction, especially of capital, from one hand to another. When, 
therefore, the debtor employs the capital he has borrowed more pro- 
ductively than the creditor would have done, the whole country is 
a gainer. Among a vigorous and energetic people this is likely to 
happen, as it is only by the productive employment of the loans 
made that interest can be paid. Here credit is an invaluable means, 
mot only of putting idle capital in motion, and of making- active cap- 
ital still more active, but especially of concentrating capital, by 
which it may gain as much in productive power as labor does by the 
cooperation of labor. This is effected usually by jointstock com- 
panies, through the agencies of the banks. Banks, then, become 
real reservoirs of capital, which receive in one place the capital 
which is superfluous elsewhere, in order to supply some other place 
with that which is necessary to it. The more confidence increases, 
the more are even the smallest driblets of capital awakened from 
their slumbers, and made active and productive. It is only by 
means of credit that the help of foreign capital can be obtained for 
liome production. Indeed, credit, considered as an exchange of 



72 READINGS IN ECONOMIC PROBLEMS 

probable future goods against actually existing goods, is one of the 
principal functions of the temporal solidarity of the economy of 
nations. Without credit there would be very little place for specu- 
lation proper. 

The man who is distinguished by the amount of his wealth, or 
by his position, is naturally known to a much wider circle than others 
are. From this it follows that he may, by the way of credit, increase 
his power, already so much greater in the economiic world, by a 
much larger multiplier. Hence, it need not surprise us that the 
great obtain credit from those in a lower position, at least as fre- 
quently as they give credit in return. 

On the side of creditor, the possibility of making loans is a 
powerful incentive to frugality. Were there no credit, those who 
were not in a position to employ their capital productively would 
make savings only within very narrow limits. 

48, The Sensitiveness of the System of Credit. 

BY E^DWARD D. J0NE;S. 

Credit creates between the members of industrial society an 
economic bond of primary strength, making the uncertainties which 
influence one party of vital concern to every other. The relations 
of debtor and creditor in modern society have been likened tO' 
the life cords used to bind together a company of mountain tour- 
ists. It is certain that, at least in times of distress, credit and money 
are those agencies O'f the market which make m-en realize the 
economic interpretation of the saying, "For none of us liveth to him- 
self, and no man dieth to himself." 

Credit serves tO' separate by an interval of tim:e the two parts 
of a complete act of exchange, and it serves to^ hold the market in a 
state of suspense as to what the effect of the postponed part of the 
transaction will be, or, indeed, whether the transaction will ever be 
completed or not. In the balancing of demand and supply, the un- 
certainty in this element of time is a very important consideration. 

The transfer of money or money's woirth, facilitated by credit, 
involves the confidence on the part of the creditor that the debtor 
is able and willing to repay the loan and tO' execute in a proper man- 
ner whatever other conditions are agreed upon. Considering the 
methods by which business is usually transacted, it is obvious that 
a large portion of credit transfers rests chiefly upon personal se- 
curity ; in short, upon probity and honor. The effects of credit vary- 
as the uses to which the wealth transferred is put. It has been 



PUNDAMBNTAL ECONOMIC INSTITUTIONS 73 

called the highest triumph and the "shadow-side" of modern cul- 
ture. 

The widespread growth of the system' of credit is ample evi- 
dence that it performs useful services. But there are dangers at- 
tached to its use. To' understand these it is necessary to observe 
the sensitiveness of the instrument. Depending as it does upon 
confidence, it is as changeable as the course of human thought. 
Credit facilitates a system of exchanges which money is incapable of 
maintaining unaided. The extension of credit is accompanied by a 
realization that if any large part of the mechanism of trade should 
meet with disaster capable of shaking confidence, the result would 
be the withdrawal of credit and a consequent stringency in the 
money market. A nervous watch is therefore maintained for such 
occurrences, and the dread of the headlong rush for liquidation, 
in which some must inevitably be crushed, always lurks in the back- ■ 
ground of modern industry. 

The specific circumstances which may lead tO' the destruction 
of credit are innumerable. Credit may be called upon to procure 
means for unproductive or unwise consumption, or for reckless 
schemes of production. In soi far as credit brings savings to in- 
vestment, it lessons the reserve fUnds both of money and commodi- 
ties which remain unentangled from the productive mechanism and 
which may be drawn upon in case that mechanism falls into disaster. 
It is said that capital renders production more roundabout. So' far 
as credit facilitates the use of capital, it assists in lengthening the 
forecast of the market which producers must make, and so increases 
uncertainty while it multiplies the number of interests involved in 
every transaction. 

The abuses of credit may manifest themselves in many forms. 
At one place they may centre in the banking policy, at another in 
joint-stock companies; at one time the fault may lie in the bank- 
ruptcy laws, at another in a reckless issue of paper money. The 
use of credit is particularly dangerous when the tone of business 
is unusually optimistic. It is also' dangerous in lines of trade in 
which estimates are unusually speculative and results are uncertain. 
The history of mining, invention', and foreign trade is replete with 
failures due to easy credit. And the modern growth of credit has 
for the first time made speculation socially dangerous. 

Credit has been called a great teacher and the discipline of 
commerce is truly a civilizing force. The coovultions of modern 
business would seem to indicate that the credit structures which 
have been raised in the business M^orld are toO' lofty for the basis 
of integrity we have at present to ofifer. The remedy lies at every 



74 



READINGS IN ECONOMIC PROBLEMS 



man's door. Civilization cannot merely migrate from country to 
country as it has done in the past ; we must learn how to intensify 
the economiic and social bonds without self-destruction and without 
the increase of those econoiTiic wastes of which crises form a part. 



F. THE CORPORATION. 
49. The Nature of the Business Corporation. 

BY HARRISON S. SMALI^EY. 

Superficially considered, a corporation is an association of per- 
sons for the acco'mplishment of certain purposes. While non-coim- 
mercial motives lead to the organization of corporations, most of 
them are formed with money-making ends in view. These last are 
called business corporations. Persons become members oi these by 
acquiring one or more shares of stock, on which account they are 
called shareholders. 

A share of stock represents an interest in the business ; hence 
a stockholder is an entrepreneur. All the shares of stock repre- 
sent all the interests in the business; and thus if there are 1,000 
shares of stock outstanding, one who owns 100 shares has a one- 
tenth interest in the business. A nominal value, called the "par 
value" is assigned by the corporation to its stock. In most cases the 
par value of a share is $100, though many companies have chosen 
other sums. The total par value of all the stock does not necessarily 
equal the value of the corporation's property. 

All net earnings, treated as profits, are distributed among the 
stockholders pro rata, and are called dividends. 

The price of a share of stock depends largely upon the rate 
of dividends customarily paid on it. If six or seven per cent, per 
annum is paid, the price will be about par ; if twenty per cent, can 
be paid each year, the price will be far above par. But numerous 
other factors, for instance, the general credit and standing of the 
company, the apparent future prospects of industries of that type, 
the condition of the money market, the general business situation, 
all share in determining the price of the stock. 

In addition to a right to dividends, the shareholder is entitled 
to other privileges and advantages. If the business is closed out, 
he has a right to his proportionate share of the net assets. During 
its Hfe he has a voice in the management of the enterprise. In ad- 
dition to electing the directors, the stockholders have a right to de- 
cide such questions of exceptional character as the issue of stocks 



FUNDAMENTAL ECONOMIC INSTITUTIONS 75 

and bonds, the amendmjent of the corporate charter, the dissolution 
of the business, etc. Aside from these few extraordinary matters, the 
stockholders are without power, for the affairs of the company 
are in the hands oi the directors, who, once elected, miay manage 
the business as they see fit. All that the stockholders can do is to 
wait until the next annual meeting and then replace the directors 
with others. 

In stockholders' meetings each stockholder has one vote for 
each share oi stock held by him. In voting for directors he has 
as many votes per share as there are directors tO' be elected. Thus, if 
five directors are to be elected and he holds one hundred shares, 
he has five hundred votes. These he can distribute in any way he 
sees fit. He can cast all for one candidate, one hundred for each of 
five, or otherwise. This is called cumulative voting. He is privil- 
eged to vote by proxy. 

In a majority of corporations, most of the stockholders take 
no active part. The control of the corporation is highly autocratic 
rather than democratic in character. Many corporations have thous- 
ands of members. Yet almost always it is dominated by less than 
a dozen men, who' may own only a minority of its stock. Few per- 
sons attend the annual meeting of the stockholders. Parties par- 
ticularly interested collect proxies of absent m-embers. Thus it is 
relatively easy for a management to perpetuate its control and to 
carry out its policies. 

In many corporations the stock is of twO' classes, common and 
preferred. The leading difference is that dividends at a certain 
fixed rate must be paid on the preferred, before any can be declared 
on the common ; but usually there are also other differences. If the 
business is closed up, the preferred stockholders usually have a 
prior claim. Not infrequently there is a difference in voting rights. 
In some cases preferred stockholders cannot vote unless their divi- 
dends are in arrears. In other cases the preferred stockholders are 
entitled to elect a certain number of directors, and the common 
stockholders the rest. 

Cumulative preferred stock is stock upon which, in addition to 
current dividends, all arrears of dividends must be paid before any 
dividends can be declared on the common. 

A corporation usually puts out bonds. The bond does not 
represent an investment in the business ; it simply evidences a debt 
owed by the corporation to an outsider. A bond is, in effect, a 
formal pro-missory note, a promise to repay money with interest at a 
certain per cent. The bondholder is not an entrepreneur, but simply 
a capitalist. In consequence he 'has no vote in corporate affairs. 



76 READINGS IN ECONOMIC PROBLEMS 

Bonds are almost invariably secured by a mortgage upon a part 
or all of the corporate property. All the stocks and bonds of a cor- 
poration are known as its securities, and the sum of the par 
values of all the securities is called the "capitalization" of the cor- 
poration. 

If a corporation is unable to pay interest on its bonds, or is 
otherwise insolvent, the proper court will, on application, appoint a 
receiver, who, as a temporar}^ officer of the court, takes charge of the 
corporate property and business. In these days it is deemed inex- 
pedient to terminate an established enterprise, except in rare cases, 
and the receiver continues the business and attempts to build it up. 

While the receiver is thus engaged, the security holders form 
one or more "reorganization committees," to put the corporation on 
a sounder basis. They must raise money to pay off back debts. Gen- 
erally they must scale down the capitalization, so that the earning 
power will cover the bond interest and also a fair rate of dividends. 
This means that existing securing holders must allow a portion of 
their securities to be cancelled, and the struggle to see how much 
each class of security holders will sacrifice is often long and bitter. 
Preferred stockholders suiter more than bondholders, and common 
stockholders more than preferred. Sometimes the stockholders are 
wholly '"frozen out." 

A corporation can be foniied only with the consent of the gov- 
ernment, and upon such conditions as the government may pre- 
scribe. The instrument, granted by the state, and specifying the 
terms and conditions upon which the corporation may engage in 
the business for which it is organized, is called the charter. In this 
country the legislative branch of the government has always exer- 
cised the function of creating corporations. According to "general 
laws," now universally in force, any group of persons, not less in 
number than a fixed minimum, can become a body corporate under 
the conditions laid down in the law. 

The corporation is a convenience. It is an imaginary entity 
through which a large body of stockholders can act as a unit. A few 
striking facts will show that in the eyes of the law the corpor- 
ation is an entity distinct from the stockholders, having a legal status 
and legal rights and liabilities of its own. First, the corporate prop- 
erty belongs to the corporation itself, not to the members. A change 
in membership does not disturb the title. Second, a corporation's 
contract is not the undertaking of its members. Third, the transfer 
of shares by the members has nO' effect upon the life of the corpor- 
ation. 

Lawyers and judges have regarded the corporation as an arti- 



FUNDAMENTAL ECONOMIC INSTITUTIONS 77 

ficial person. The trouble resulting from that concept has been 
evident in connection with the penal laws concerning corporations. 
We have attempted to punish the corporation for violations of law, 
when it is evident that in every offense the real actors are human 
beings. To inflict a fine on a corporation is to lay a burden on the 
whole body of stockholders. In reality a few men committed the 
offense. Such a method of corporate punishment is, therefore, as 
unjust as it is ineffectual. Consequently there has arisen the say- 
ing "guilt is personal," and we are now beginning to attack the re- 
sponsible individuals themselves. 

The true view of the corporation would seem to be that it is an 
imaginary entit}^ Avhich ser^^es the association of persons as a con- 
venient instnmient through which they may conduct their business. 

50. Distribution of Risk and Control in the Corporation. 

BY W. H. I.YOX. 

The corporation makes possible a parceling-out of the incidents 
of ownership in many combinations, an allotment of management, 
risk, and income in varvang proportions. The line of apportionment 
becomes very flexible. 

Actual practice has already carried far the division, sub-division, 
and rearrangement. The corporate form marks the line of division 
of management into administration and control. Shareholders pos- 
sess control, but through directors delegate administration tO' officers. 
Varying rights given special classes of stock make a widely vanning 
apportionment of income, control, and risk. Common stockholders 
accept a maximum of risk in expectation of a maximum of income. 
They may share the incident of control equally or in var\"ing propor- 
tions with other classes of stock. If two classes of stock enjoy ex- 
actly equal rights, except that one has preference as tO' income, 
they do not divide control, but risks, and the combination of control 
plus risk in one, as compared with the combination of control plus 
risk in the other, makes the ownership represented by one class 
entirel}^ different from the ownership represented by the other. 

We may speak of these divisions and combinations of income, 
control, and risk, creating different kinds of ownership, as horizon- 
tal divisions. But there is another division of ownership, that repre- 
sented by the number of shares of stock or the number of bonds. 
It makes a division into amount of ownership rather than kind, into 
quantity rather than qualit}^, a perpendicular division. 

Now these two kinds of division of ownership accomplish two 
very different results. The perpendicular division of amounts of 



78 READINGS IN ECONOMIC PROBLEMS 

ownership makes possible the fitting of every man's pocketbook or 
financial ability. The horizontal division into kinds of ownership 
makes possible a more difficult fitting than fitting a man's pocket- 
book. It makes possible the fitting oi his type or state of mind. 
One man may be more or less willing to take a chance than another. 
The same man may be more willing at one time than another. He 
may be unwilling to take any risk without having some control. 

A corporation's stock regularly carries the largest share of pres- 
ent control and also regularly the largest share of risk. The stock 
may itself divide into two or more classes having obviously diver- 
gent interests, with the result that each class will exercise for differ- 
ent purposes the amount of control it possesses. If there is common 
stock and preferred stock with a limited dividend, the common share- 
holders may throw their influence in favor of a more hazardous 
conduct of the enterprise with an expectation of greater profit 
accruing to them. Since the preferred stockholders get only lim- 
ited dividends, they will throw their influence in favor of a safer 
conduct of the business. Interests of both classes of stockholders 
might coincide. If the corporation should not earn enough to pay 
full dividends on preferred stock, the preferred stockholders might 
desire the more hazardous conduct of the business. If the amount 
of preferred and common were the same, and each had the same 
voting power, each class would enjoy control equally. In practice 
this might not lead to a dead-lock in policy, for one shareholder own- 
ing a large amount of common and a small amount of preferred 
might vote his preferred to favor his common. If the amount of 
common were twice as great as the amount of preferred, and a share 
of each class had the same voting rights, the quality of control 
would in a way differ just as truly as if the amounts of each class 
were equal but a greater voting power were given the common 
than the preferred. In either case the common shareholder in a 
clash of interests wmild be more likely to have the corporation's 
policy incline to his advantage. 

A corporation having only one class of stock, and no other secu- 
rities, offers the simplest type. Such a security carries all the con- 
trol, all the income, and all the risk. It effects only a vertical divis- 
ion of ownership. This form is proper if a satisfactory division 
of income, management, and risk cannot be made. A mining com- 
pany especially cannot well divide the peculiar hazards of the enter- 
prise. Since any class of mining securities must retain so much 
risk, investors will not sacrifice anything of income or control. So 
it follows that nearly all mining corporations, including oil com- 
panies, have only one class of stock and no other securities. Coal- 



FUNDAMENTAL ECONOMIC INSTITUTIONS 79 

mining companies have issued bonds to some extent, but this busi- 
ness rests upon a more assured basis than mining for metals. Man- 
ufacturing companies frequently issue no securities but their com- 
mon stock. This is probably due to the fact that they are engaged 
in established kinds of business and folloiW the precedents set by 
the older partnerships. So far our financial ingenuity has directed 
itself for the most part to the comparatively new forms of business, 
railroads and other public-service corporations. With the coming 
of the big industrial concerns more complex forms of financing ap- 
pear, and will probably make their way generally into industrial 
corporations. Though a holding company may have only common 
stock, that fact does not necessarily imply simplicity, for the sub- 
sidiary companies may have complex capitalizations. 

51. Methods of Stock Watering. 

BY THE INDUSTRIAI, COMMISSION. 

The principal methods of stock watering still employed are the 
following : 

1. The commonest is the payment of so-called stock dividends 
to shareholders. "These consist either of an outright bonus of new 
shares of stocks or bonds, or in a mitigated form, of stocks sold 
below par or at less than market quotations." Examples are the 
80 per cent, stock dividend of the New York Central, in 1868 ; the 
Reading scrip dividends between the years 1871 and 1876; the Chi- 
cago, Burlington and Quincy, and Atchison stock dividends of 20 
per cent, and 50 per cent, respectively in 1880 and 1881 ; and the 
famous Boston and Albany distribution of stock in 1882. 

2. Consolidation of railroad properties offers opportunities to 
increase capital surreptitiously in various ways, (a) One is through 
the issue oi new stock to defray the entire expenses of betterment 
of the operating plant, (b) Sometimes, again, the constituent com- 
panies are gerrymandered soi that the successful concerns with sur- 
plus earnings are combined with roads less favorably situated, thus 
making it possible to distribute earnings at a comparatively low 
dividend rate, (c) The third device connected with consolidation 
consists in substituting a high-grade for a low-grade security. A 
weak company, whose stock is quoted, say, at 50, may be merged 
in a second corporation whose stock stands at 100. The latter may 
then issue new stock worth $100 in exchange for the $50 stock, 
share for share. 

3. A third method is the substitution of stock issues for funded 
debt. It has the advantage of giving great elasticity tO' future divi- 



8o READINGS IN ECONOMIC PROBLEMS 

dend possibilities. The substitution of 8 per cent, stock for 4 per 
cent, bonds facilitates the absorption of increasing earnings in the 
future. The stocks also permit of cessation of dividends during 
periods of depression. The substitution of stocks for bonds in this 
way is not, however, so harmful to the public interest, provided the 
stock issues are subject to- control by state commissions. 

4. Another expedient for increasing capitalization is the fund- 
ing of contingent liabilities. Large amounts of such liabilities, in 
the forms of bills payable, wages and salaries due, and the like, 
may be covered by the issues of interest-bearing scrip. This is un- 
questionably bad financiering, as floating debts should, in general, 
be provided for out of earnings. 

52. "The Function of the Corporation. 

BY F. W. TAUSSIG. 

The advantages of the corporation for the development of in- 
dustry have been great. In the first place, large-scale operations 
have been facilitated. Many modern enterprises require so great 
a capital that no individual could supply it. Yet the corporate com- 
bination of numierous individuals can supply the means for any 
undertaking, however large. 

Then new enterprises have been promoted by the corporate lim- 
itation of liability. The progress of invention, the diversification 
of business, have made many ventures at first uncertain and risky. 
It is comparatively easy to induce a person to take a few shares in 
a novel undertaking presenting possibilities of profit ; but, if par- 
ticipation involves also the possible loss of his whole fortune, he 
will be slow to join. Limitation of liability has induced such invest- 
ments. 

Most important is it that the corporate form of organization 
has brought about an ease of investment, and consequently has stim- 
ulated the saving of capital. In the eighteenth century the only 
possible way of investing in securities was through the purchase of 
public obligations. The modern security market, on the other hand, 
offers an almost limitless field for the investment of savings, great 
and small. Railways, factories, steamships, mines, — all are con- 
ducted under corporate form, and corporate obligations represent- 
ing them can be bought at a moment's notice. Savings have been 
made liquid, and can flow with ease and in any desired volume wher- 
ever there is a prospect of their advantageous use. This has stim- 
ulated savings and has brought about an immense increase in real 
capital. ■ 



FUNDAMENTAL ECONOMIC INSTITUTIONS 8i 

The consequences of ease of transfer for corporate shares de- 
serves special attention. It makes possible a greater division of 
risks. A person who has invested in a given corporation is not 
thereby committed to the bitter end. If he does not think well of 
his prospects he can sell his shares to another person who has a 
better opinion of the venture. Ease of sale facilitates venturesome 
O'perations and permits them tO' be carried on at a smaller margin 
of profit. Thus it operates as an insurance against risk and stimu- 
lates investments in new: enterprises. Transferability also brings 
ownership and control into the hands of the shrewd and competent. 
Those who judge best of the prospects of an enterprise and who 
exercise influence intelligently toward its skillful management buy 
out those who are less capable. Judgment does tell immensely, and 
transferability of shares makes it tell. 

Transferability, however, has some consequences that are not 
so clearly beneficial. The sense of association for common ends has 
virtually disappeared among the shareholders oi the modern cor- 
poration. Each looks out for himself, deserts the venture in case of 
expected loss, or, if he expects a gain, gathers in from his associates 
a larger number of shares for his own profit. This, too, has brought 
into existence the modern stock exchanges. Shares are peculiarly 
adapted for speculative dealings. By far the larger part of the 
transactions on the exchanges have nothing to do directly with the 
process of actual investment. Thus the investment of capital is 
accompanied by a vast deal of unproductive efifort in the way of 
stock gambling. 

Control passes not only to the shrewd, but to the unscrupulous 
also. The directors who are best informed about the prospects of 
a corporation play the game with loaded dice wdien they buy from 
the ordinary shareholder. In the eye of the law the director is in a 
fiduciary position. In small corporations the moderate violation of 
fiduciary duty is frowned upon by public opinion also. But in the 
great corporations the rig'ging of the market and speculative profit 
from inside information are not condemned with seriousness in bus- 
iness circles. The whole fry of buyers and sellers of stock are try- 
ing to overreach each other. Those who fail lack only the shrewd- 
ness or good fortune, not the will, to get the booty. 

Yet corporate management has shown a high regard for the 
duties of directors and officers. Almost invariably the rights of the 
stockholder who is registered on the books are scrupulously respect- 
ed. He gets the benefit of every accruing profit, however ignorant 
or incompetent he be in the details of management. This sort of 
regard for the stockholder is a sine qua non of corporate invest- 



82 READINGS IN ECONOMIC PROBLEMS 

merit. Without the certain maintenance of the mechanism' for car- 
rying" on the agreed operations, the whole fabric of corporate in- 
vestment would collapse. It is in the process of buying and selling 
that there is play for manipulation. 

Another consequence of the growth of corporations has been the 
increasing power of financial middlemen. The investor has ceased 
to use personal care in the use of his saving's. The investment banks 
are the most important real directors o^f the course of investment. 
From them the public buys its securities. What corporations shall 
be organized, what industries carried on, what railways, mines, fac- 
tories equipped, is decided by the financial middleman, in consulta- 
tion with the more immediately active managers of industry. Hence 
the great power of those bankers whoi secure the confidence and 
support of numbers of investors. 

It is common to speak of the control of a great enterprise as 
being in the hands of an individual, or a few individuals. Control 
of this sort signifies, not concentrated ownership, but concentrated 
power, based on the confidence which a multitude of investors have 
in the judgment and leadership of commanding personalities. The 
concentration of control in few hands shows itself most striking^ly 
in the United States. Though reluctant to concentrate political con- 
trol, we are unhesitating in the acceptance of concentrated industrial 
control. Here directors in industrial corporations are often no more 
than figureheads, while presidents are benevolent despots. This 
development oi one-man rule has no doubt promoted boldness, effi- 
ciency, progress ; but it has also concentrated power in a way to 
justify uneasiness. 

Still another consequence is an advance in the stability of the 
investor's position. The ingenuity of the financial middleman in 
vying for the custom of the great army of savers has provided more 
and more secure ways of investment. All sorts of securities are 
offered; not only those with risks and with a possibility of large 
returns, but those with low return and absolute safety. The posi- 
tion of the property owner, if he is content with a low rate of return, 
is highly secure. It used to be said that the maintenance of a for- 
tune calls for as much ability as the making of it ; that riches have 
wings; that it is but three generations from shirt sleeves to shirt 
sleeves. This is far from being the case in modern times. 

Chiefly as the result of corporate organization, a sort of ab- 
stract, or distilled property has grown up, exempt from the vicissi- 
tudes of industry. The rich and the well-to-do can make their posi- 
tion almost impregnable, and, through inheritance, can maintain it 
indefinitely. A leisure class, based on savings, investment, and pro- 
ductive enterprise, has become a stable part of modern society. 



FUNDAMENTAL ECONOMIC INSTITUTIONS 83 

53. Disadvantages of the Corporate Form. 

BY HUNRY ROGERS SPACER. 

It is probably within the truth tO' say that one-half of the business 
of the United States is now controlled by corporations and there is 
every indication that the proportion is increasing'. This makes im- 
portant the recognition of certain drawbacks attaching to^ the cor- 
porate form of organization. Chief among these is the fact that 
responsibility for the managemient of corporations is diffused. In 
one-man businesses and partnerships the men who organize and 
manage the enterprise are the ones most vitally interested in its suc- 
cess. In corporations the stockholders, who usually furnish the 
capital required and have tO' bear the loss if things go^ wrong, irb- 
trust their interests to the board of directors. The board of direc- 
tors in turn deputes the actual managemient of the business tO' a 
salaried president or manager who' may not, and often does not, 
have any further interest in the business than that his reputation 
depends upon the honesty and wisdom with which he manages it. 
The enterpriser function is thus divided in the corporation between 
three parties no one of whom has the same vital interest in the bus- 
iness that a single enterpriser or partner feels in businesses con- 
ducted under other plans. Moreover, few directors or managers 
have not, at times, private interests in conflict with the corporate 
interests they are supposed to promote. This diffusion of responsi- 
bility and interest causes corporate management to be often waste- 
ful and sometimes corrupt. The salaries are frequently higher than 
they need to* be to secure the required grade of labor, appointments 
are often determined by personal rather than by business consider- 
ations, and inflated prices are sometimes paid for materials in conse- 
quence of the fact that particular directors are interested in their 
production. More common than these clear violations of trust are 
misrepresentations in regard to the affairs of the corporation in- 
tended to influence the stock market and tO' enable those interested 
to carry through deals for their own benefit. 

Another abuse is connected with the borrowing power of cor- 
porations. When this power is used to secure money by the sale of 
bonds the law gives to bondholders no voice in the management of 
the corporation so long as their interest is paid and the principal is 
not defaulted. The larger the proportion of the capital required 
for any enterprise that is secured through the sale of bonds, the 
smaller is the interest in the business of the stockholders, who nev- 
ertheless continue to control it. It has often happened in connec- 
tion with railway corporations in the United States that the entire 



84 



READINGS IN ECONOMIC PROBLEMS 



capital has been secured by selling bonds and that the stock has 
represented merely a bonus paid to the promoters of the company. 
This is a situation fraught with danger, as American experience has 
abundantly proved. To give a fictitious value to their stock, pro- 
moters are only too apt to pay dividends out of earnings that should 
be expended for renewals and replacements. Before the corporation 
is reduced to bankruptcy they can usually sell their holdings to un- 
suspecting investors and retire, leaving to them the task of reor- 
ganizing the business. 

A third set of evils has reference to the general or public inter- 
est in corporations. Individuals in their pursuit of gain are con- 
trolled by the moral standards of their business associates. Cor- 
porations have no moral standards. Their directors have shown 
themiselves willing to wink at practices on the part of the officials 
they appoint to which they w^ould not themselves stoop. Corpora- 
tion officials, moreover, do not hesitate to do things in the name and 
under the cover of the corporations which they would be ashamed 
to perform openly for themselves. In the United States corpora- 
tions have been guilty of buying legislatures, bribing judges, enter- 
ing into agreements with political parties insuring them certan priv- 
ileges in return for campaign contributions, and in fact of every sin 
in the political calendar. It is largely owing to them that the tone 
not only of business, but of political morality, is so much below the 
standards of private life. 

54. Rights and Duties of Corporations. 

BY HENRY C. ADAMS. 

There is another event recorded by industrial history which 
shows the necessity of a new interpretation of industrial relations. 
I refer to the appearance of corporations and to the completeness 
with which they have transformed the industrial structure. The 
word corporation opens an almost limitless field of investigation to 
the student of industrial history, but I shall venture to suggest only 
in what manner the development of this form of association has 
contributed to the current confusion respecting industrial rights 
and industrial duties. Corporations were originally regarded as 
agents of the state. They were created for the purpose of enabling 
the public to realize some social or national end without involving 
the necessity of direct governmental administration. They were 
in reality armis of the state, and in order tO' secure efficient manage- 
ment, a local or private interest was created as privilege or property 
of the corporation. A corporation, therefore, may be defined in the 



PUNDAMBNTAL ECONOMIC INSTITUTIONS 85 

light of history as a body created by law for the purpose of attain- 
ing public ends through an appeal to private interests. 

A corporation, as it appears in the latter half of the nineteenth 
century, differs in every essential particular from the original con- 
ception out of which it grew. Its public purpose and its dependence 
on government have both been lost to view, while its character as 
a private industrial concern has been especially emphasized. Three 
points respecting- the modern coirporation sho'Uld be noted in order 
to appreciate the influences which emanate from it. 

First. The growth of the corporation and the consequent cen- 
tralization of industrial power is only Hmited by the market for the 
goods which it produces or the services which it renders. This is 
true because the credit of corporations is practically without limit. 
The bearing of this fact may easily be perceived. It was assumed 
by those who formulated the doctrine that the principle of competi- 
tion was an adequate guarantee of justice and equity in business 
affairs ; that any particular business would be represented by a large 
number of independent and competing organizations. Yet it is clear 
that their development tends to destroy the conditions under which 
competition is alone able to perform its beneficent service. 

Second. Corporations are coming tO' conceive of themselves as 
business associations of perpetual life. The contracts which they 
enter into> bind not only the present but the future, and, when it is 
understood that gain in the present is the motive directing these 
contracts, it is easy tO' see that the best interests of the future may 
be jeopardized. I cannot suggest even, at this time, the far-reaching 
consequences of this peculiarity of corporate organization, but must 
content myself with the remark that the considerations which led 
reasonable men of half a century ago to approve the philosophy of 
industrial individualism, did not include the observation that a body 
of men organized for the purpose of private gain should ever plead 
the interests of a perpetual existence. Such a plea, it was assumed, 
pertained to the state alone. 

Third. Corporations do not recognize the principle of righteous- 
ness, candor, courtesy, or indeed, any of the personal virtues, except 
energy and enterprise, which, according to the old English econ- 
omists, are assumed to be essential to continued business success. I 
do not say that the common virtues may not be ap'preciated by men 
entrusted with the management of corporate enterprises, or that 
they do not practice such virtues in their personal affairs ; but such 
is the nature of intercorporate competition, especially for industries 
in which success is measured by the volume of business transacted, 
that the managers of corporations are obliged to recognize a dual 



86 READINGS IN ECONOMIC PROBLEMS 

code of ethics — one for the business, one for the home. Your at- 
tention was called to^ the peculiarity of corporate organization for 
the purpose of presenting yet another reason why the old rules of 
•business conduct are not pertinent to the latest phase of industrial 
development. The old theory of society which assumes identity 
between personal interests and social morality may possibly have 
been true when industries stood forth in the person of those who 
conducted them ; but, to claim that this is true as business is at pres- 
ent organized, is to ignore the influences which corporations have 
exerted upon the character of business. If it be true that the 
growth of corporate enterprise is only hmited by the world's de- 
mands, that its life is only limited by that of the civilization to 
which it pertains, and that it is deprived of those restraining influ- 
ences which work so powerfully upon the individual, is it not clear 
that a new theory of industrial relations becomes a necessity? 



G. SPECULATION. 
55. The Zoology of Stock Speculation. 

BY CH ARISES DUGUID. 

To use the time-honored definition, the Bull is one who buys 
what he does not want, and the Bear is one who^ sells what he has 
not got. The Bull buys stock that he does not want, in the hope 
that he will be able tO' sell it at a higher price before it comes into 
his possession, pocketing the difference. The Bear sells stock that 
he has not got, in the hope that he will be able to buy it at a lower 
price before he has to deliver it. The Bull is optimistic, he believes 
that the price will rise ; the Bear is pessimistic, he believes it will 
fall. 

If the advance which the Bull desires has not occurred before the 
time of settlement arrives, he would be in a quandary but for the 
organization which exists in the Stock Exchange to meet his case. 
Having bought what he does not want, he certainly does not desire 
to pay for it, and he is enabled to continue his bargain. The actual 
process of arranging this consists in selling out the security and 
then repurchasing it, both the sale and the repurchase occurring at 
the "makirig-up" price. Though technical rules on exchanges vary, 
this price is usually the actual market-price at a defined moment. 
If the making-up price is lower than that at which the Bull pur- 
chased, he has, of course, to pay the difference. In the case of the 
Bear, having sold stock he has not got, he certainly does not desire 



FUNDAMENTAL ECONOMIC INSTITUTIONS 87 

to deliver it at the settlement, and, just like the Bull, he is able to 
continue his bargain. If, in spite of his desire, the price of the stock 
has risen, he has to pay the difference between the price at which 
he bought and the settlement making-up price. 

Without the Bulls and Bears, life in the Stock Exchange would 
be a dull affair, for the anxiety that stO'cks and shares should rise 
and fall within a short period naturally leads to excitement, and un- 
doubtedly causes the promulgation of many rumors and the exag- 
geration of actual news. The very existence of a big Bull account, 
or of a big Bear account, naturally has a most important effect upon 
the market. Every Bull is of course a potential seller, and every 
Bear a potential buyer. While the Bulls are buying prices may rise, 
and while the Bears are selling they may fall ; but the time comes 
when their operations, however successful, have to be completed, 
and the movement in the opposite direction sets in. Good news is 
frequently followed by a sharp relapse in prices, because of the 
selling by Bulls anxious to take advantage of it. Bad news is fre- 
quently without effect, ot followed by a rise, because the Bears see 
their opportunity of buying back the stock they have sold. Thus it 
comes that the rates at the settlement are eagerly watched, that 
some information may be obtained as to whether a Bull account or 
a Bear account exists. 

The Bulls may have it all their own way, and by concerted ac- 
tion, called a "Bull campaign," bring about a "rig." This, however, 
is a condition of the market the artificiality of which becomes very 
evident when the time for selling sets in. Unless the delicate posi- 
tion is handled with extreme skill, there will be left after the un- 
loading a residue of stale Bulls, Bulls who are compelled to close 
their accounts at a loss. On the other hand the Bears may have it 
all their own way. By concerted action the^ may "bang the market," 
indulge in a "Bear raid," and bring prices down to a low level. 
The talk is all gloom. At the end of the raid, however, the position 
of the Bear is an exceedingly dangerous one; he may find it im- 
possible to obtain the stock which, having sold, he has undertaken 
to deliver. Prices begin to rise again, and the "Bear covering," or 
buying back, only enhances the upward movement. In time it may 
become impossible to buy back at any price; there is no stock ob- 
tainable; the Bears are "cornered." Unless a Bear so situated can 
make terms with the one to whom' he has sold the stock, he stands 
in the position of one who cannot meet his engagements, or, tO' use 
another term of Stock Exchange zoology, he is a Lame Duck. 



88 READINGS IN ECONOMIC PROBLEMS 

56. Why the Prices of Securities Rise and Fall. 

BY FRANCIS W. HIRST. 

In the first place the value of a security depends mainly upon a 
quality wihich a bale of cotton or a ton of coal does not possess. It 
is either actually or potentially interest-bearing. This quality is vis- 
ible in a bond with coupons attached. A bond like that bought by 
subscribers to a Prussian state loan will have attached to it quarterly 
or half-yearly coupons, which can be cashed in almost any great cen- 
tre of finance. If the government promises to redeem the bond at 
the end of a definite period at par, at its maturity the bond will be 
worth par. In the meantime it will rise and fall according to the 
conditions, first of German credit, secondly of the international rate 
of interest. But these tendencies may be wholly or in part counter- 
acted by antagonistic movements oi an international character, for 
instance, a great war which destroys a vast amount of capital and 
absorbs vast quantities of savings. But the Prussian bond is not 
likely to fluctuate much, and the limits of its fluctuations will be the 
more restricted the more nearly it approaches its maturity. Thus 
the value of a security depends mainly upon ( i ) the rate of interest, 
(2) the safety of the principal, and (3) the likelihood of the princi- 
pal or the rate of interest either rising or falling. These are the 
main causes of a rise or fall in securities. 

But the business of the Stock Exchange operators is to endeavor 
to forecast and discount in advance the natural fluctuations oi in- 
trinsic value. In the old days before the telegraph, fortunes were 
made by getting early information, or spreading false information 
of victories and defeats, which would enhance or depress the price 
of stocks. The first Rothschild laid the foundations of his immense 
fortune by getting early news of important events. Nowadays the 
principle is still the same, but the art of anticipation has been made 
much more doubtful anff complicated. Telegraphs and telephones 
are open to all. What everybody reads in his morning paper is oi 
no particular use to^ anybody in a speculative sense. Besides many 
foreign governments keep large funds in London and Paris for the 
express purpose of supporting the market. Hence in the market 
for Government bonds, big movements are rare. 

When we come to the prices of railroad and industrial stocks the 
causes of movement are much more difficult toi detect, and the possi- 
bilities of making large profits by inside knowledge is much greater. 
The newspapers may be the conscious or unconscious tools of the 
manipulators. In new countries the banks are likely to be a working 
part of the speculative machinery. Thus in the United States those 



FUNDAMENTAL ECONOMIC INSTITUTIONS 89 

who use great fortunes in finance frequently have a controlling' in- 
terest in a bank. What is called a "community of interest" may be 
established which will control important railroads and huge indus- 
trial corporations, as well as a number of banks and trust com- 
panies. The various wa.ys in which such a community may manipu- 
late a susceptible market like Wall Street might be made the subject 
of a long and fascinating volume. 

Suppose that a powerful group wishes to create the appearance 
of a general trade depression in the United States. To' do so is not 
at all impossible. The controlled railways may announce and even 
partially carry out a policy of reduced orders for rails, equipment, 
and repairs. They may ostentatiously proclaim an addition to the 
number of idle cars. Well-disciplined combinations of steel and 
textile mills may declare a curtailment of production. Banks may 
suddenly become ultra-conservative; the open accounts and credits 
of small speculative customers may be closed. In this way a general 
feeling of despondency can be created. Stocks will fall, partly in 
consequence of the action of the banks, causing a compulsory liqui- 
d'ation of speculative accounts, partly through the voluntary action 
of speculators who think that trade, earnings, profits, and dividends 
are likely to decline. Thus a bear market is created. The syndi- 
cate can now employ huge funds toi advantage in profitable pur- 
chases of those stocks and shares which fall most and are most 
responsive to ups and downs. Such a policy of course represents 
great difficulties and dangers. It must be carried out very cautious- 
ly and very secretly, and ver}^ honorably as between the members. 
And if it is too successful it may create a slump, or a panic, in which 
the community of interests may itself be seriously involved. For 
these and other reasons American operators and manipulators do 
not frequently enter upon a concerted plan for colossal bear opera- 
tions. Such a scheme is unpopular. It offends public sentiment. 
A long bicarish movement, accompanied by unemployment, reduced 
earnings, and economies in expenditure, produce all manner of un- 
pleasant consequences, economic, social, and political. In fact big 
men often boast that they never operate upon the short side, never 
play for a fall. 

Such a movement as that sketched above is comparatively rare, 
cautious, and temporary. Wall Street has of course to wait upon 
circumstances. Sometimes it is caught by the circumstances. But 
it must always try tO' adjust itself tO' economic and pohtical condi- 
tions. A political assassination, a war, a movement against the 
trusts, unfavorable decisions in the courts, an unexpected downfall 
of the favourite political party, a catastrophe like the San Francisco 



90 READINGS IN ECONOMIC PROBLEMS 

earthquake^ — such events as these may produce an irresistible flood 
of Hquidation against which the strongest combination of bankers 
and corporation mien will struggle in vain. In a general scramble 
produced by some unexpected event there is more likely to be a gen- 
eral loss than a general profit. For in the history of speculation the 
unexpected event is usually a calamity. 

Real prosperity is built up gradually. The Stock Exchange an- 
ticipates and exaggerates it, until the speculative fabric has been 
reared so high above the real foundation that a crash is seen to be 
inevitable. Generally speaking, because of superior knowledge, the 
insiders are able to unload at high levels, just as they have been able 
to load at low levels. So, by speculating in stocks of a national size 
and significance, the outside public loses more than it gains. It 
begins tO' buy when they are dear, and it begins to sell when they 
are cheap. 

For purposes of scientific analysis we may rest the theory of 
Stock Exchange quotations upon a distinction between prices and 
values. Prices are temporary ; values are intrinsic ; they move slow- 
ly. The price represents the momentary market value of a stock 
or bond. The value is the real worth, a thing undefinable and im- 
possible to ascertain. If the real value were ascertainable and avail- 
able to the public then price and value would be identical, and in the 
case of gilt-edge securities, the two are as nearly as possible identi- 
cal. But intrinsic values themselves change like everything else in 
the world. They depend mainly upon (i) the rate of interest, (2) 
the margin of surplus earning power or revenue. 

Both stocks and bonds are also afi^ected in their intrinsic value 
by the money market and the relationship of the supply Oif capital 
seeking investment to the demand for capital by new flotations. The 
intrinsic value of common stock depends also upon the actual effi- 
ciency of the corporation, the condition of its plant, the skill of its 
management, and the coiitentment, intelligence, and industry of its 
whole staff. 

Of course all these changeful elements of intrinsic value enter 
into prices. But as prices so'metimes fluctuate violently, it is obvious 
that they must also be afifected by other causes. These may be 
summed up under two heads : ( i ) False rumors, which have got 
about either by design or through the carelessness or mistakes oi 
newsmongers; and (2) Rigs, pools, combinations, and other techni- 
cal devises, by which the market is either flooded with, or made bare 
of, a particular stock or group of stocks. 



FUNDAMENTAL ECONOMIC -INSTITUTIONS 91 

57. The Social Value of the Stock Exchange. 

BY WIIvUAM C. VAN ANTWERP. 

Everywhere, in all ages, markets are held because people de- 
mand them in their effort to secure proper prices by competitive 
bidding and offering. Buyers seek the largest markets they can get 
in order to obtain the lowest prices; sellers, in order to o'btain the 
highest prices ; and so it was learned long agO' that economy of time 
and labor, as well as a theoretically perfect market, could be best 
secured by an organization under one roof of as many dealers in a 
commodity as could be found. The result, moreover, is best accom- 
plished when the organization is so controlled by rigid rules O'f 
business morality as to insure to every one who does business there 
an absolutely square deal. In such a market every purchase is made 
with a most thorough acquaintance with the conditions involved. 
Each dealer, each broker, each speculator, strives tO' obtain the best 
knowledge of the supply and demand, and each buyer and seller 
has an equal and fair opportunity. The larger the body of brokers, 
the more accurate the standards of value thus created. 

To illustrate the price-making function of the Exchange, take 
the case of the Western farmer. The farmer can sell his crop, even 
though it has not been planted. Whenever he sells, and under what- 
ever conditions, he enjoys the authoritative establishment of a price, 
fixed as clearly as matters are fixed in law. Moreover, the price at 
which he elects to sell is the best price, the fairest price, and the 
most scientific price that human agencies can arrive at, because it 
is made by world-wide competitive bidding at the hands of skilled 
men, all competing by cable and telegraph. Like the Grain Ex- 
change, the Stock Exchange serves the same price-making function. 

Machine-production requires the corporate organization of bus- 
iness. Such an organization, which comhines the small savings of 
thousands into large sums and gives to the masses an intelligent 
directing force at the hands of highly trained experts, depends for 
its existence upon the sale of its securities. But capital cannot be 
enlisted in industrial activity without market-places or Stock Ex- 
changes. It has been found that transactions in the securities which 
represent the people's money should be rendered easy, quick, and 
safe, and that the very essence of the Exchange's functions consists 
in protecting the people who are the actual owners of business enter- 
prises. In all the great centres of the world Stock Exchanges are 
af work in this important field. In proportion to the confidence 
which a country feels in such a market, so enterprise goes forward 
with vigor, and so the national wealth increases. The success of 



92 READINGS IN ECONOMIC PROBLEMS 

one enterprise in its appeal to public credit through the medium of 
the Stock Exchange invariably leads to another ; thus commerce and 
industry develop. Securities in America alone aggregate the total 
of forty-three billion dollars, more than one-third of the nation's 
wealth. These securities are owned by almost two million people. 
Having learned the difficult lessons of saving and judicious invest- 
ment, are not these people entitled to the safeguards of the Stock 
Exchange? Until the last century property and trade were so in- 
secure that if a man saved money, he had tO' hide it, or lend it 
through a money-broker at such usurious rates as would compensate 
him for bad debts. Today all this is changed by the banks and Stock 
Exchanges. 

Small investors, nO' less than large ones, require great conven- 
ience and promptness for their operations ; living widely apart, they 
must put full reliance on prices made by the Stock Exchange; they 
must have the most* accurate: inf oirmation ; they want prices fixed 
by the most scientific competition and by the largest possible num- 
ber of competitors ; they require a market in which they can sell and 
get their money at once; above all things they must know that they 
are dealing with reputable men. 

For these reasons the Stock Exchange exists. If it did not exist 
there Avould be no standard market for a large part of the country's 
material wealth. The investor on the one hand and the patent or 
railway on the other have nothing in common. Left to themselves 
they would never meet. They would be useless because resources 
and money have to be brought together to create wealth. A primary 
function of the Stock Exchange is to bring them together, and by 
standardizing prices, create values. Similarly, the investor, without 
the Stock Exchange to guide him, would have nowhere tO' turn for 
a fair price secured by competitive bidding. Worse than that, with- 
out a Stock Exchange to create standards and define the difference 
between good and bad investments, very many people would be at 
the' mercy of an army of dishonest promoters. 

Another great seiwice rendered by the Stock Exchange is the 
means it affords for transferring securities readily from hand to 
hand. To appreciate the importance of this fact, you have but to 
think of the difficulties and delays that attend the transfer of other 
forms of property which doi not enjoy Exchange facilities. The 
necessity for a quick sale of real estate affords an excellent example. 
The holder of securities is altogether independent. He knows the 
price of his holdings every hour in the day. He is exposed to no 
fraud. He has positive assurance that in the case of necessity, at 
a moment's notice, he can obtain at the prevailing price the value in 



FUNDAMBNTAL ECONOMIC INSTITUTIONS' 



93 



cash of every Stock Exchange security in his box. Such a man 
knows that the price which the ticker shows him represents the 
epitomised opinion oi the market and that it is a critical expression 
of the future. 

58. The Functions of Exchanges. 

BY CHARLES A. CON ANT. 

The fundamental function of the exchanges is to give mobility 
to capital. Without them the stocks and bonds of the share com- 
pany could not be placed to advantage. No one would know what 
their value was on a given day, because the transactions in them 
would be private and unrecorded. The opportunities for fraud 
wO'Uld be multiplied a hundred fold. The mobility for capital af- 
forded by the corporation would be meager and inadequate if the 
holder of its bonds and shares did not know that at any moment 
he could take them to the exchanges and sell them. The publicity 
prevailing in stock-exchange quotations gives the hodder of a security 
not only the direct benefit O'f publicity, but the opinion of the most 
competent financiers of Europe and America. If they were dealing 
with him privately, they might withhold the information. But the 
quoted price stands as a guide to even the most ignorant holder of 
securities. 

The second benefit is in affording a test of the utility to the com- 
munity of the enterprises which solicit the support of investors. The 
judgment of experts is there expressed, through the medium of 
price, on the utility of the object dealt in. If an unprofitable rail- 
road is built in the wilderness of Manitoba, the investor docs not 
have to hunt up information on the freight and passengers carried : 
he has only to look at the quotations on the New York Stock Ex- 
change to know at once the judgment of experts on it as a com- 
mercial venture. If the investor finds that the stocks of cotton- 
mills are declining, he makes up his mind that there are nO' further 
demands for cotton mills. If stocks are exceptionally high, he 
knows that the public demands more cotton mills, and that an in- 
vestment in them will prove profitable. All this information is put 
before the investor in a single table of figures. It would be prac- 
tically unattainable in any other form,. Thus there is afforded to 
capital throug'hout the world an almost unfailing index of the course 
in which new production should be directed. 

Sup'po'se for a moment that the stock markets of the world were 
closed, that it was no longer possible to learn what concerns were 
paying dividends, what their stocks were worth, how industrial es- 
tablishments were faring. How would the average man determine 



94 READINGS IN ECONOMIC PROBLEMS 

how new capital shouild be invested. He would have no guide ex- 
cept the most isolated facts gathered here and there at great ex- 
pense and trouble. A great misdirection of capital and energy- 
would result. The stock market is the great governor of values, — 
the guide which points the finger tO' where capital is needed and 
where it is not needed. 

The very sensitiveness of the stock market is one of its safe- 
guards. Again and again it is declared in the market reports that 
certain events have been discounted. As a consequence when the 
event actually happens, it results in nO' such great disturbance tO' 
values as was expected. Is it not better that this discounting of 
future possibilities should occur? Is it desirable that capital and 
production should march blindly to the edge of a precipice and then 
leap off, instead of descending a gradual decline? This discounting 
of the market enables the man whO' holds a given security to- convert 
it into money without being ruined. It enables the prudent man to 
hold on to his securities and even to buy those of the frightened and 
more excited. 

The produce exchanges afford a form of insurance. They en- 
able a man with contracts to execute in the future tO' ascertain today 
what will be the cost of his raw material in the future, and to know 
that he will get the raw material at that cost. Prudent dealers in 
great staples go into the market and buy and sell futures in such a 
way as to protect themselves, just as the prudent man or family goes 
to the insurance company and pays a premium in order to get a 
guarantee that his family will be protected against his death. 

Another important influence of the stock exchange is that which 
it exerts upon the money market. The possession by any country 
of a large mass of salable securities affords a powerful guarantee 
against the eft"ects of a severe money panic. If in New York there 
arises a sudden pressure for money, the banks call in loans and 
begin to husband their cash. If they hold large quantities of securi- 
ties salable on the London or Paris or Berlin market, a cable order 
will effect the sale of these in an hour, ai^d the gold proceeds will 
soon be available. These securities prevent sudden contraction and 
expansion in the rate of loans. This influence of the stock market 
has much the effect of a buffer upon the impact of twO' solid bodies. 
Crises are prevented when they can be prevented, and when they 
cannot they are anticipated, and their force is broken. Securities 
are in many cases better than money. If a large shipment of money 
has to be made fromi New' York to London, it is much more eco- 
nomical to ship securities of the same amount than to ship kegs of 
gold. Credit is forwarded by cable and the securities follow by 



FUNDAMENTAL ECONOMIC INSTITUTIONS 95 

mail. All markets are thus brought into touch with each other, and 
respond to a fluctuation of a fraction of one per cent, but without 
the confusion and crash which would ensue if every sudden pressure 
for money was felt upon a market naked of such securities. 

There is another important consideration in this influence of the 
stock market upon modern society, which will perhaps gather up 
and bring into a clearer light some of the other points which have 
been made. The stock market, by bringing all values to a level in 
a common and public market, determines the direction of produc- 
tion in the only way in which it can be safely determined 
under the modern industrial system of production in anticipa- 
tion of demand. It does so by offering the highest price for money 
and for the earnings of money at the point where they are most 
needed. It is only through the money market and the stock ex- 
change together that any real clue is afforded of the need for capital, 
either territorially or in different industries. Capital is attracted to 
securities that are selling high because the industries they represent 
are earning well. Consequently there results a closer adjustment 
oi production to consumption, of the world's work to the world's 
need, than would be possible under any other system. 

59. Speculation and the Preservation of Competition. 

BY HARRISON H. BRACe:. 

Competing business houses are by no means of equal strength. 
No small business house in its competition with a large company 
should be deprived of any help or agency which exists as a natural 
part of the world of commerce. The legislator should be especially 
careful not to destroy any agency which already helps to put the 
small business house on an equality with its larger competitor. 
Among such democratic influences of commerce is the custom of in- 
surance. A man of vast business interests does not need insurance 
so much as small operators. The small business man, by its aid, may 
undertake venturesome business enterprises and compete with the 
larger company on favorable terms. 

The speculative exchange constitutes a kind of underwriting 
organization in its broader sense, and renders it possible for men of 
moderate means to engage in a wide field of business operations. 
Were this form of insurance crippled, many of them would find no 
profitable employment for their capital and activities. The specu- 
lative exchanges deal in commodities or securities of uncertain 
value, and are so articulated with the commercial system that the 
business houses which are producing and distributing these com- 



98 READINGS IN ECONOMIC PROBLEMS 

instance, are not traded in for future delivery, and the method by 
which they are bought shows the same preponderating control of 
market conditions. Oil also is an example. Where the number of 
buyers is few, and the commiodity regularly dealt in, the expedient 
of making some kind of arrangement whereby bidding shall be re- 
stricted is obvious. For the present the speculative exchanges intro- 
duce an important competing element intO' the calculations of those 
who would like to become monopolists. 

The markets furnished by organized speculation represent the 
most complete development of the competitive system and of democ- 
racy in trade, as opposed to monopoly and concentration of wealth 
and power. Upon the exchanges any one may deal, even though 
he have no extensive plant or arrangements for carrying commodi- 
ties. At the same time other business men outside the exchanges 
may rely upon the option system to protect them against vicissitudes 
which would otherwise cause them tO' abandon the field. Thus or- 
ganized speculation represents freedom of action and at the same 
time cooperation and division of labor and O'f functions. It is the 
people working with separate wills, and yet organized sO' comjpletely 
that they can accomplish their purposes by joint action. 

60. The Experience of Germany with Stock Exchanges. 

BY THE HUGHES COMMITTEE. 

In 1892 a commission was appointed by the German government 
to investigate the methods of the Berlin Exchange. The regular 
business of the Exchange embraced both securities and commodi- 
ties; it was an open board where anybody by paying a small fee 
could trade. The broker could make such charge as he pleased for 
his services. Margins were not always required. Under the cir- 
cumstances many undesirable elements entered the exchange. 

The commission was composed of governmental officials, mer- 
chants, bankers, manufacturers, professors of political economy, and 
journalists. Its report was completed in November, 1893. Al- 
though there had been a wide-spread popular demand that all short 
selling be prohibited, the commission reported that such a policy 
would be harmful to German trade and industry. They were will- 
ing, however, to prohibit speculation in industrial stocks. 

The Reichstag, however, rejected the recommendations of the 
commission, and in 1896 enacted a law much more drastic. The 
landowners, constituting the powerful agrarian party, contended 
that short-selling lowered the price of agricultural products, and 
demanded that contracts on the Exchange for the future delivery of 



FUNDAMENTAL ECONOMIC INSTITUTIONS 99 

wheat and flour be prohibited. The Reichstag assented to this de- 
mand. It also prohibited trading on the Exchange in industrial and 
mining shares for future delivery. It enacted that every person de- 
siring to carry on speculative transactions be required to enter his 
name in a public register, and that speculative trades by persons not 
so registering be deemed ganiibling contracts and void. The object 
was to deter small speculators and to restrict speculation to men of 
character and capital. 

The results were quite different from the intention of the legis- 
lature. Men of character and capital declined to advertise them- 
selves as speculators. The small fry found no difficulty in evading 
the law. Foreign brokers flocked to Berlin and established agencies 
for the purchase and sale of foreign stocks. Seventy such offices 
were opened in Berlin within one year after the law was passed 
and did a flourishing business. German capital was thus transferred 
to foreign markets. The Berlin Exchange became insignificant and 
the financial standing of Germany as a whole was impaired. 

There was, however, even a more serious consequence of the 
new law. While bankers and brokers were required to register, 
their customers were not compelled to do so. Consequently the 
latter could speculate through different brokers on both sides of the 
market, pocketing their profits and welching on their losses as gam- 
bling contracts. Numerous cases of this kind arose, and in some 
the plea of wagering was entered by men who had previously borne 
a good reputation. 

Another consequence was to turn over to the large banks much 
of the business previously done by independent houses. Persons 
who desired to make speculative investments in home securities ap- 
plied directly to the banks, depositing with them satisfactory security 
for the purchases. As the German banks were largely promoters 
of new enterprises, they could sell the securities to their depositors 
and finance the enterprise with the deposits. This was a profitable 
and safe business in good times, but attended by danger in periods 
of stringency, since the claims of depositors were payable on de- 
mand. Here again the law worked grotesquely, since customers 
w^hose names were not on the public register could, if the specula- 
tion turned out badly, reclaim the collateral or cash they had depos- 
ited as security. 

The evil consequences of the law brought about its partial repeal 
in 1908. By a law then passed the government may, in its discre- 
tion, authorize speculative transactions in industrial and mining 
securities of companies capitalized at not less than $5,000,000 ; the 
Stock Exchange Register was abolished; all persons whose names 



loo READINGS IN ECONOMIC PROBLEMS 

were in the commercial directory were declared legally bound by 
contracts made by them on the Exchange. Other persons, while not 
legally bound by such contracts, could not reclaim deposits of cash 
or collateral security for speculative contracts, on the plea that the 
contract was illegal. 

Germany is now seeking to recover the legitimate business 
thrown away twelve years ago. It still prohibits short selling of 
grain and flour, although the effects of the prohibition have been 
quite different from those which its supporters anticipated. As 
there are no open markets for these products, and no continuous 
quotations, both buyers and sellers are at a disadvantage ; prices are 
more fluctuating than they were before the passage of the law 
against short-selling. 



III. 

THE SOCIAL CONTROL OF INDUSTRIAL 
ACTIVITY. 



A. SOCIAL PROGRESS. 
6i. The Nature of Social Progress. 

BY I,. T. HOBHOUSi:. 

I use the term "evolution" in regard to human society, and also 
the term "progress." This should imply that there is some differ- 
ence between them. By evolution, I mean any sort of growth; by 
social progress, the growth of social life in respect to those qualities 
to which human beings attach or can rationally attach value. Social 
progress, then, is only one among many possibilities of social evolu- 
tion. At least it is not to be assumed that every and any forai of 
social evolution is also a form or stage in social progress. For- 
example, the caste system is a product of social evolution, and the 
more rigid and narrow the caste, the more complex the hierarchy, 
the more completely has the caste system evolved. But most of us 
would question very strongly whether it could be considered in any 
sense a phase of social progress. So again there is at the present 
day a vigorous evolution of cartels, monopolies, rings and trusts ; 
there is an evolution of imperialism, of militarismi, of socialism, of 
a hundred tendencies as to the good or evil of which people differ. 
The fact that a thing is evolving is no proof that it is good ; the fact 
that society has evolved is no proof that it has progressed. The 
point is important because umder the influence O'f biological con^ 
ceptions the two' ideas are often confused, and the fact that human 
beings have lived under certain conditions is taken as proof of the 
value of those conditions, or perhaps as proving the futility of ethi- 
cal ideas which run. counter to evolutionary processes. Thus in a 
recent article I find a contemptuous reference to "the childlike 
desire to make things fair," which is "so clearly contrary to the 
order of the universe which progresses by natural selection." In 
this brief remark you will obsen^e two- immense assumptions, and 
one stark contradiction. The first assumtption is that the universe 
progresses — not humanity, observe, nor the mass of organic beings, 
nor even the earth, but the universe. The second is that it pro- 
gresses by natural selection, a hypothesis which has not yet ade- 
quately explained the bare fact of the variation of organic forms 



102 RBADINGS IN ECONOMIC PROBLEMS 

on the surface of the earth. The contradiction is that progress is 
incompatible with fairness, the basic element in all judgments of 
value, so that we are called upon to recognize as valuable that by 
which our fundamental notions of value are set at naught. 

By studying certain sides of organic process people arrive at a 
particular hypothesis of the nature of the process. They erect this 
hypothesis into an universal and necessary law, and straightway 
call upon everyone else to acknowledge the law and conform to 
it in action. They do not see that they have passed from one sense 
of law to another, that they have confused a generalization with a 
command, and a statem,ent of facts with a principle of action. They 
accordingly miss the starting point fi-om' which a distinct conception 
of progress and its relation to human effort becomes possible. But 
for any useful theory of the bearing of evolution on social effort 
this conception is vital. We can get no^ light upon the subject un- 
less we begin with the clear perception that the object of social 
effort is the realization of ends to which human beings can ration- 
ally attach value, that is to say, the realization of ethical ends ; and 
this being understood, we may suitably use the term progress 
of any steps leading towards such realization. 

Our conclusion so far is that the nature of social progress can- 
not be determined by barely examining the actual conditions of 
social evolution. Evolution and progress are not the same thing. 
They may be opposed. They might even be so fundamentally op- 
posed that progress would be impossible. 

Because of the influence of biological notions on social and 
economic thought, one phase of the Darwinian theory must be noted. 
The main effect of his work in the world of science was tOi generate 
the conception of the progress of organic forms by means of a 
continuous struggle for existence wherein those best fitted by 
natural endowment to cope with the surroundings would tend to 
survive. In our field, after Darwin, it began to be held that man, 
in spite of his philosophy, was still an animal, still subject to the 
same laws of reproduction and variation, still modifiable in the 
same manner by the indirect selections of the individuals best 
fitted to their environment. The biological social philosopher had 
not to trouble himself about what was best ; nor, like the social 
investigator, to remain in doubt as to the broadest principles regu- 
lating the life of society. On both these questions his doubts were 
already solved by what he had learned in biolo^gy itself. The best 
was that which survived, and the persistent elimination of the unfit 
was the one method generally necessary tO' secure the survival of 
the best. Armed with this generalization he found himiself able 
to view the world at large with much complacency. 



SOCIAL CONTROL OF INDUSTRY 103 

To him life was constantly and necessarily growing better. In 
€very species the least fit were alwa_vs being destroyed and the 
standard of the survivors proportionately raised. No doubt there 
remained in every society many features which at first sight seemed 
objectionable. But here again the evolutionist was in the happy 
position of being able to verify the existence of a soul of goodness 
in things evil. Was there acute industrial competition? It was 
the process by which the fittest came to the top. Were the losers 
in the struggle left to welter in dire poverty? They would the 
sooner die out. Were housing conditions a disgrace to civilization ? 
They were the natural environment of an unfit class, and the means 
whereby such a class prepared the way for its own extinction. Was 
infant mortality excessive? It weeded out the sickly and the weak- 
lings. Was there pestilence or famine? So many more of the 
unfit would perish ? Did tuberculosis claim a heavy toll ? The tuber- 
cular germs are great selectors skilled at probing the weak spots 
of living tissue. Were there wars and rumors of wars? War 
alone would give to the conquering race its due, the inheritence of 
the earth. In a word the only blot that the evolutionist could 
see upon the picture was the "maudlin sentiment" which seeks to 
hold out a hand to those who are down. The one sinner against 
progress is the man who tries to save the lamb from, the wolf. 
Could we abolish this unscientific individual, the prospects of the 
world would be unclouded. 

Yet, before we apply biological conceptions to social afifairs, we 
generally suppose that the highest ethics is that which expresses 
the completest mutual sympathy and the most highly evolved 
society that in which the efforts of its members are most completely 
■coordinated to common ends, in which discord is most fully sub- 
dued to harmony. Accordingly we are driven to one of twO' alter- 
natives. Either our valuations are completely false, our notions 
of higher or lower unmeaning, or progress does not depend upon 
the naked struggle for existence. The biologist would cheerfully 
accept the first alternative. As we have already seen, he is dis- 
posed to tell us that we vainly seek to distort truth by importing 
our ethical standards. He is quite ready tO' insist that we must 
subordinate our judgmients of value to the survival test. We must 
judge good that which succeeds. Unfortunately for him at that 
stage his whole theory becomes a barren tautology. Progress now 
in his view results from the survival of the fittest, because pro'gress 
is the process wherein the fittest survive. Again it is always the 
fittest who survive, because the fact of their survival proves their 
iitness. 



I04 READINGS IN ECONOMIC PROBLEMS 

B. THE RISE OF LAISSEZ-FAIRE. 
62. The Individualistic Spirit of America. 

BY WAI.TER E. WEYI.. 

The westward march of the pioneer gave to Americans a psy- 
chological twist which was tO' hinder the development of a social- 
ized democracy. The open continent intoxicated the American. It 
gave him an enlarged view of self. It dwarfed the co^mmon spirit. 
It made the American mind a little sovereignty of its own, acknow- 
ledging no allegiances and but few obligations. It created an in- 
dividualism, self-confident, short-sighted, lawless, doomed in the 
end tO' defeat itself, as the boundless opportunities which gave it 
birth became at last circumscribed. 

The colonists were more self-reliant than even the original, self- 
reliant British stock, since, broadly speaking, only selected men 
essayed the ocean journey. With the aid of his family, the colonist 
plowed his acres, shot his game, caught his fish, made his soap and 
candles, dressed and cured his leather, spun and wove, did his own 
carpentering, and sometimes his own smithing. He made what he 
ate, wore, and lived in, and he made and held his own opinions. 
His philosophy was that of the lonely self-contained farmhouse. 
As the continent was transformed by the settlers, so in turn the 
settlers were transformed by the continent. It was the continent that 
created the typical individualistic American spirit. The scattering 
of so small a population over so large an area led to an unpre- 
cedented exaggeration of the centrifugal forces of society. The 
individual stood alone. 

The most representative type of this American individualism 
was the pioneer. It was he who' typified the expansive force of 
American civilization in the rarefied American continent. His al- 
most savage individualism triumphed over forest, swamps, malaria, 
privation, and solitude. It transformed his rough log cabin into 
a "castle" and his vague far-reaching land and his roaming swine 
into his "property." It showed itself in a sense of complete self-cur- 
tailment and in a churlish though free hospitality. 

The self-reliant, aggressive individualism of the pioneer was also 
the spirit of the American factory builder, town boomer, railroad 
wrecker, promoter, trust manipulator, and a long line of spectacu^ 
larly successful industrial leaders. In the Western land, however, 
individualism was a national, not a class, characteristic. The con- 
tinent was one enormous workshop, and it was new, not like the 
scarred European continent, which had been the burying ground 



SOCIAL CONTROL OF INDUSTRY 



105 



of centuries of fighting, starving populations. It was not that 
American industrial leaders imitated the pioneer, but that they were 
subject to conditions similar tO' his. Everywhere in America there 
was a low external pressure, which resulted in an inflation of indi- 
vidualities. The pioneer acted for himself because there were no 
others ; he knew no law because he knew no society. So-, with the 
others, the vastness of the land compared with the fewness of the 
people, the richness of the land compared with the labor of the 
people, induced an instinctive taking, an instinctive wasting, a sense 
oi magnificence, a toleration of others, and a lawless, traditional 
exploitation of natural resources according tO' the will and ideas 
of each. 

American individualism showed itself in a certain magnificence, 
which to this day afifects the life of the nation. The American, 
like a young heir, developed a confused sense of abounding wealth. 
He did not mind waste, for he throve while wasting with both 
hands. He derided small gains and petty savings. Small gains 
were for small men. This ''magnificence" revealed itself in ways 
ludicrous and grandiose. More than in anything else it showed 
itself in American bragging. The nation, its resources, excellencies, 
and virtues, were coiloissal, continental. Even its vices were bound- 
less, and therefore, admirable. This magnificence invaded the arid 
intellectual .life of America. It inspired our perfervid oratory. It 
was the very essence of our humor. 

Another side of this individualism was an illimitable, supreme:, 
categorical optimism. As the wasted lands led to new lands, as the 
ruined man rose richer than before, a feeling spread that all was 
well with America. Evils there were, but the continent was large, 
movement easy. Economic crisis gave way to newer prosperity. 
Invention, scientific discovery, improved transportation, opened 
the continent ever wider, and the optimism of America clung with 
invincible credulity to the inevitaibleness of progress. Faith in 
America, faith in one's self, became a creed. The cautious maxims 
of poverty-bred generations were belied. In America a rolling 
stone did gather moss ; in America a penny saved was a dollar lost. 
The dissenter, the ever-falsified prophet of evil, was derided. Despite 
political corruption and absurd legislation, despite an extravagance 
of errors, the rallying continent and the invincible buoyancy of the 
American spirit triumphed. Confidence, not caution, was the law 
oif business. 

A corallary of American optimism was tolerance. This toler- 
ance, which was half-part indifference, extended to slavery, slums, 
piratical business, and political corruption. The presence of a com- 



io6 READINGS IN ECONOMIC PROBLEMS 

munity of unlike free men, the fluidity of American life, the easy 
association in business and society O'f diverse elements, the free ex- 
change of goods and ideas between different sections, and prosperity, 
all made for tolerance. To' a well-fed, well-housed, suitably-mated 
man, few beliefs, opinions, or prejudices were intolerable. 

The continent made us a "practical" people. We judged pol- 
icies by results; by immediate, visible, realizable results. We did 
not think things out. We did not generalize. Our political and 
economic life appeared as a disconnected succession of suddenly 
arising problems, each of which was tO' be singly met. We did not 
determine on definite long-time policies. America lived under the 
domain of the immediate. The Americans were a "practical" people. 

The crass, unbounded individualism of the practical American 
found its highest expression in private business and the quest for 
money. America was called the Land of Dollars. The dollar was 
omnipotent. Traditions being weak, classes inchoate, and the state 
inactive, the individual in measuring his success accepted this only 
available standard. The very fluidity of the nebulous communities, 
the ease with which one man became successfully laborer, teacher, 
farmer, lawyer, soldier, legislator, and banker, and the prevalence 
of the creed that any man could do anything, tended to reduce all 
the inequalities of life to the one equality of the dollar. It was, 
moreover, a useful and essential standard ; for it was the dollar, 
not the title of nobility, or the university degree, that could conquer 
the land. The possession of money was prima facie evidence of a 
man's usefulness to society. Each man worshipped in the million- 
aire the apotheosis of his individual self. 

American individualism, applied to business, explained all our 
then economic arrangements and all our business methods and tra- 
ditions. It led to a veritable "pay streak" theory of business. The 
American followed the one lead, raised the one crop, worked the 
one vein, cut the best trees, took everywhere the cream of the cream. 
The American shipbuilder built ships to sail, not to last. Factories 
and cities were built for immediate profit, like the cheap shanties 
O'f a moving gang of Polish railroad laborers. Intensity became the 
law of business. The night was made "joint laborer with the day." 
In the North the free workers were lured into intense labor and 
excessive overtime; in the South, on some of the plantations 
of Louisiana, it was found profitable to work off a stock of 
negroes once every seven years and buy a new set with the pro- 
ceeds of the cane. As for the property, the goose was worth less 
than the golden e^g. 

The sequel of such untrammeled individualism was a brutally 



SOCIAL CONTROL OF INDUSTRY 107 

unprincipled code of business ethics. Every man was presumed 
capable of playing his own game. If a simple-minded man bought 
a broken-winded horse, a salted gold mine, a city lot in Lake Michi- 
gan, or the mythical wooden nutmeg, it was his lookout. He could 
not protest to a community which would have laughed at the fool 
and his folly. The buyer did what some men do when they receive 
a counterfeit dollar. He kept silent and passed it on. Upon com- 
petitors, the individualist turned the same batteries. Competition, 
the fetish of America, was largely unregulated by public opinion. 
In the relentless struggle for patronage, bribery, treating, false 
pretense, the buying of rivals' agents, the damaging of rivals' wares, 
ingenious chicanery of all sorts, entered into the game. Competition 
was war, and in war all was fair. 

The individualism of America led to gambling; competition 
was gambling. The continent offered a fortune to the lucky specu- 
lator. There was no foretelling the fancy of the public. Men 
bought, luckily or unluckily, mines, stocks, great tracts of land ; 
they appealed to the God of Chance as they appealed to the silent 
continent. They placed the years of their lives and their precarious 
fortunes upon the cast of a die. America was one large gambling 
"joint," where money, success, and prestige were the counters, and 
the players were old men and young woinen, pioneers and workmen, 
and little boys, devoutly reading conventionalised biographies of 
successful men. 

It was indeed a strange psychological world in which the Amer- 
ican individualist found himself, when, with the reaching of the 
frontier, American enterprise turned back upon itself. The little 
gambler was like the belated boy who dreams of a Far West of In- 
dian trails, but finds there only railways and automobile roads. The 
individualistic American was dumfounded when he saw favorable 
terminal facilities, public service franchises, and other special priv- 
ileges, given to a competitor, had ended competition ; when he saw 
the trusts organizing a fictitious competitiori against themselves. 
The individualist could no longer rely upon his automatic "unalien- 
able rights" and his fair field and no favor. Individually he was 
impotent and he was still an individualist. The monopolist was also 
an individualist, unabashed and unreconstructed. Into his hands 
fell the usufruct of science and invention. He sat at the gate taking 
a tribute which grew as millions were added to the population. Like 
Pippa he sang, "God's in His heaven ; all's right with the world." 



io8 READINGS IN ECONOMIC PROBLEMS 

C. HISTORICAL ASPECTS OF THE LAISSEZ-FAIRE 

CONCEPT. 

63. The Fundamental Law of Nature. 

BY wiLUAM bi,ackstone;. 

As, therefore, the Creator is a being, not only oi infinite power 
and wisdom, but also of infinite goodness, he has been pleased so to 
contrive the constitution and frame of humanity, that we should 
want no other prompter to enquire after and pursue the rule of 
right, but only our self love, that universal principle of action. For 
he has so intimately connected, so inseparably interwoven the laws 
of external justice with the happiness of each individual that the 
latter cannot be attained but by observing the former, and if the 
former be punctually obeyed, it cannot but induce the latter. In 
consequence of which mutual connection of justice and human 
felicity, he has not preplexed the law of nature with a multitude 
of abstracted rules and precepts, referring merely to the fitness or 
unfitness of things, as some have vainly surmised, but has graciously 
reduced the rule of obedience to this one paternal precept, "that 
man should pursue his own true and substantial happiness." This 
is the foundation of what we call ethics or natural law; for the 
several articles into which it is branched in our system amount 
to no more than demonstrating that this or that action tends to 
man's real happiness, and therefore very justly concluding that the 
performance of it is a part of the law of nature; or, on the other 
hand, that this or that action is destructive to man's real happiness, 
and therefore that the law of nature forbids it. 

64. A Diatribe against Human Institutions. 

BY J. J. ROUSSKAU. 

All things are good as their Author made them, but everything 
degenerates in the hands of man. By mian our native soil is forced 
to nourish plants brought from foreign regions, and one tree is 
made to bear the fruit of another. Man brings about a general 
confusion of elements, climates, and seasons ; he mutilates his dogs, 
his horses, and his slaves ; he seems to delight only in monsters and 
deformity. He is not content with anything as Nature left it. 

As things now are, a man left to himself from his birth would, 
in his association with others, prove the most preposterous creature 
possible. The prejudices, authority, necessity, example, and, in 
short, the vicious social institutions in which we find ourselves sub- 



SOCIAL CONTROL OF INDUSTRY 109 

merged, would stifle everything natural in him, and yet give him 
nothing in return. He would be like a shrub which has sprung up 
by accident in the middle of the highway, to perish by being thrust 
this way and that and trampled upon by passers-by. All our wisdom 
consists in servile prejudices; all our customs are but suggestions, 
anxiety and constraint. Civilized man is born, lives, dies in a state 
of slavery. At his birth he is sewed in swadling clothes ; at his death 
he is nailed in a cofiin; as long as he preserves the human form he 
is fettered by our institutions. 

65. A Plea against Governmental Restraints. 

BY ADAM SMITH. 

Every individual is continually exerting himself to find out the 
most advantageous employment for whatever capital he can com'- 
mand. It is his own advantage, indeed, and not that of the society, 
which he has in view. But the study of his own advantage, natur- 
ally, or rather necessarily, leads him to prefer that employment which 
is most advantageous tO' the societ}^ 

First, every individual endeavors to employ his capital as near 
home as he can, and consequently as much as he can in the support 
of domestic industry, provided always that he can thereby obtain the 
ordinary, or not a great deal less than the ordinary, profits of stock. 
Secondly, every individual who employs his capital in the support 
of domestic industry necessarily endeavors so to direct that industry, 
that its produce may be O'f the greatest possible value. 

The produce of industry is what it adds to the subject or 
materials upon which it is employed. In proportion as the value of 
this produce is great or small, so will likewise be the profits of the 
employer. But it is only for the sake of profit that any man em-- 
ploys a capital in the support of industry ; and he will always, there- 
fore, endeavor to employ it in the support ot that industry of which 
the produce is likely to be of the greatest value, or tO' exchange for 
the greatest quantity either of money or of other goods. 

But the annual revenue of every society is always precisely equal 
to the exchangeable value of the whole annual produce of its in- 
dustry, or, rather, is precisely the same thing with that exchange- 
able value. As every individual, therefore, endeavors as much as 
he can both tO' employ his capital in the support of domestic in- 
dustry, and so to direct that industry that its produce may be of 
the greatest value, every individual necessarily labors to render the 
annual revenue of the society as great as he can. He generally, 
indeed, neither intends to promote the public interest, nor knows 



I lo READINGS IN ECONOMIC PROBLEMS 

how much he is pro'iiiioting it. By preferring- the support of do- 
mestic tO' that of foreign industry, he intends only his own security ; 
and by directing that industry in such a manner as its produce may 
be of the greatest value, he intends only his own gain, and he is 
in this, as in many other cases, led by an invisible hand to promote 
an end which v/as no^ part of his intention. Nor is it always the 
worse for the society that it was no part of it. By pursuing his own 
interest he frequently promotes that of the society more effectually 
than when he really intends to promote it. I have never known 
much good done by those who affected to trade for the public good. 
It is an affectation, indeed, not very common among merchants, 
and very few words need be employed in dissuading them from it. 
What is the species of domestic industry which his capital can 
employ, and of which the produce is likely tO' be of the greatest 
value, every individual, it is evident, can, in his local situation, judge 
much better than any statesman or lawgiver can do for him. The 
statesman who should attempt to direct private people in what 
manner they ought to- employ their capitals would not only load 
himself with a most unnecessary attention, but assume an authority 
which could safely be trusted, not only toi no single person, but to 
no council or senate whatever, and which would nowhere be so 
dangerous as in the hands of a man who- had folly and presumption 
enough to fancy himself fit tO' exercise it. 

66. A General Condemnation of Government. 

BY WII.UAM GODWIN. 

Society is an ideal existence, and not on its own account entitled 
to the smallest regard. The wealth, prosperity, and glo-ry of the 
whole are unintelligible chimeras. Set noi value on anything, but 
in proportion as you are convinced of its tendency to make indi- 
vidual men happy and virtuous. Benefit, by every practical mode, 
man wherever he exists ; but be not deceived by the specious idea 
of affording services to a body of men, for which no individual man 
is the better. Individuals cannot have too frequent or unlimited 
intercourse with each other; but societies of men have no interests 
to explain and adjust, except so- far as error and violence may 
render explanation necessary. This consideration annihilates at 
once the principal objects of that mysterious and crooked policy 
which has hitherto occupied the attention of governments. 

Government can have but two legitimate purposes, the suppres- 
sion of injustice against individuals within the community, and the 
common defence against external invasion. 



SOCIAL CONTROL OF INDUSTRY m 

Legislation, that is, the authoritative enunciation of abstract 
or general propositions, is a function of equivocal nature, and will 
never be exercised in a pure state of society, or a state approaching 
to purity, but with great caution and unwillingness. It is the most 
absolute of the functions of government, and government is itself 
a remedy that invariably brings its own evils along with it. Legis- 
lation, as it has been usually understood, is not an affair of human 
competence. Reason is the only legislator, and her decrees are irre- 
vocable and uniform. The functions of society extend, not to- the 
making, but the interpreting of law; it cannot decree, it can only 
declare that which the nature of things has already decreed, and the 
propriety of which irresistibly flows from the circumstances of the 
case. 

The true reason why the miass of mankind has so often been 
made the dupe of knaves has been the mysterious and complicated 
nature of the social system. Once annihilate the quackery of 
government, and the most homebred understanding will be prepared 
to scorn the shallow artifices of the state juggler that would mis- 
lead him. With what delight must every well informed friend of 
mankind look forward to the auspicious period, the dissolution of 
political government, of that brute engine, which has been the only 
perennial cause of the vices of mankind, and which has mischiefs 
of various forms incorporated with substance, and not otherwise 
to be removed than by its utter annihilation. 

. 67. The Identity of Individual and Social Good. 

BY PIERCY R.\VEN STONE). 

Nature has implanted in every man's breast an instinct which 
teaches him intuitively to pursue his own happiness ; and, by con- 
necting the welfare of every part of society with that of the whole, 
she has wisely ordained that he shall not be able toi realize his 
own wishes without contributing to the happiness of others 

Every man may thus safely be intrusted with the care of work- 
ing out his own prosperity. It is not necessary for governmients, 
it is therefore no part of their duty, to teach tO' individuals what 
will most conduce to the success of their pursuits; they are ill-cal- 
culated for such a superintendence. All care of this sort is on their 
part wholly impertinent. Their functions are of quite a different 
nature ; to correct the vicious attachment to their own interests which 
too frequently induces men to seek their own apparent good by the 
injury of others, which would disorder the whole scheme of society, 
to bring about what they mistakenly consider their own happiness. 



112 READINGS IN ECONOMIC PROBLEMS 

To restrain, not to direct, is the true function of the government ; 
it is the only one it is called on to perfonn,, it is the only one it can 
safely execute. It never goes out of its province without doing 
mischief. The mischief is not always apparent, for the constitution 
of the patient is often sufficiently strong to resist the deleterious 
effects of the quackery. But it is not safe to try experiments which 
can do no good, merely because the strength of the patient may pre- 
vent them from being injurious. 

The spirit of interference has never manifested itself so strongly 
as of late years. It constitutes the very essence of modern political 
economy. Everything is to be done by the state; nothing is to be 
left to the discretion of individuals. It is proposed tO' transfer men 
into a species of political nursery-ground, where the quality of 
plants is to^ be regulated with mathematical exactness, to^ be fitted 
to the capacity of the soil; where every exuberance in their shoots 
is to be immediately pruned away, and their branches confined within 
the bounds of the supporting espalier. 

68. A Protest against Useless Restrictions. 

BY JEREMY BENTHAM. 

Ashurst. — The law of this country only lays such restraints on 
the actions of individuals as are necessary for the safety and good 
order of the comimunity at large. 

Truth. — I sow corn : partridges eat it, and if I attempt to defend 
it against the partridges, I am fined or sent to gaol : all this, for fear 
a great man, who is above sowing corn, should be in want of par- 
tridges. 

The trade I was born to is overstocked; hands are wanting in 
another. If I offer to work at that other, I may be sent to gaol for 
it. " Why ? Because I have not been working at it as an apprentice 
for seven years. What's the consequence? That, as there is no 
work for men in my original trade, I must either come upon the 
parish or starve. 

There is no employment for me in my own parish: there is 
abundance in the next. Yet if I offer to go there, I am driven away. 
Why? Because I might become unable to work one of these days, 
and so I must not work while I am aible. I am thrown upon one 
parish now, for fear I should fall upon another, forty or fifty years 
hence. At this rate how is work ever to be got done? If a man is 
not poor, he won't work : and if he is poor, the law won't let him. 
How then is it that so much is done as is done? As pockets are 
picked— by stealth, and because the law is so wicked that it is only 



SOCIAL CONTROL OF INDUSTRY 113 

here and there that a man can be found wicked enough to think of 
executing it. 

Pray, Mr. Justice, how is the community you speak of the better 
for any of these restraints? and where is the necessity of them? and 
how is safety strengthened or good order benefitted by them ? 

But these are only three out of this thousand. 



D. THE CHARACTER AND MEANING OF LAISSEZ- 
FAIRE. . 

6g. The Economic-Political Philosophy of Individualism. 

BY ALBERT V. DICEY. 

IndividuaHsm as regards legislation is popularly connected with 
the name and the principles of Bentham. The ideas which under- 
lie the Benthamite or individualistic scheme of reform may con- 
veniently be summarized under three leading principles and two 
corollaries. 

• I. English law, as it existed at the end of the eighteenth cen- 
tury, had developed almost hap-hazard, as the result of customs 
or modes of thought which had prevailed at different periods. The 
laws had for the most part never ben enacted. In order to amend the 
fabric of the law we must, so Bentham insisted, lay down a plan 
grounded on fixed principles. Legislation, in short, he proclamied, 
is a science based on the characteristics of human nature, and the 
art of law-making, if it is to be successful, must be the application 
of legislative principles. 

II. The right aim of legislation is the carrying out of the 
principle of utility, or, in other words, the proper end* of every law 
is the promotion of the greatest happiness of the greatest number. 

This principle is the formula with which popular memory has 
most closely connected the name o^f Bentham. Whatever objections 
this principle may be open to, one may with confidence assert that 
it is far more applicable to law than to morals, for at least two 
reasons : First, legislation deals with numbers and with whole classes 
of men ; morality deals with individuals. It is obviously easier to 
determine what are the things which as a general rule promote the 
happiness of a large number of persons, than to form even a con- 
jecture as to what may constitute the happiness of an individual. 
Let it be noted that the law aims not at positive happiness, but only 
citizens of a state. It merely favors the existence of the con- 
ditions under which it is likely that its subjects will prosper. But 



114 



READINGS IN ECONOMIC PROBLEMS 



here we come across another distinction. Secondly, law is concerned 
primarily with external actions, and is only very indirectly concerned 
with motives. Morality, on the other hand, is primarily concerned 
with motives and feelings. But it is far easier to maintain that 
the principle of utility is the proper standard of right action than 
that it supplies the foundation on which rests the conviction of right 
or wrong. 

Ideas of happiness, it has been objected, vary in different ages, 
countries, and among different classes; a legislator, therefore, gains 
no real guidance from the dogma that laws should aim at pro- 
moting the greatest happiness of the greatest number. To this 
objection there exists at least two answers. The first is that, even 
if the variability of men's conceptions of happiness be admitted, 
the concession proves no more than that the application of the 
principle of utility is conditioned by the ideas of human welfare 
which prevail at a given time in a given country. There is no reason 
why utilitarianism should refuse to accept this conclusion. Different 
laws may promote the happiness of diiferent people. The second 
reply is that, as regards the conditions of public prosperity, the 
citizens of civilized states have, in modern times, reached a large 
amount of agreement. For instance, who* can seriously doubt that 
a plentiful supply of cheap food, efficient legal protection against 
violence and fraud, and the freedom of all classes from excessive 
labor conduce to the public welfare? What man out of Bedlam 
ever dreamed of a country the happier for pestilence, famine and 
war? Laws deal with very ordinary matters, and deal with them in 
a rough and ready manner. The character, therefore, of a law, 
may well be tested by the rough criterion embodied in the doctrine 
of utility. 

There stilt exists, however, an objection that must be examined 
with care. Bentham' and his disciples have displayed a tendency to 
underestimate the diversity between human beings. They have too 
easily accepted the notion of uniformity in ideas of happiness in 
different countries and different ages. This supposition has facil- 
itated legislation, but it has led to the feeling that laws which in 
the ninteenth century promoted the happiness of Englishmen, must 
at all times promote the happiness of the inhabitants of all countries. 

The foundation then of legislative utilitarianism is the combi- 
nation of two convictions. The one is the belief that the end of 
human existence is the attainment of happiness ; the other is the 
assurance that legislation is a science and that the aim of laws is 
the promotion of human happiness. 

III. Every person is in the main and as a general rule the 



SOCIAL CONTROL OF INDUSTRY 115 

best judge of his own happiness. Hence legislation should aim at 
the removal of all those restrictions on the free action of an indi- 
vidual which are not necessary for securing the like freedom on 
the part of his neighbors. 

This dogma of laissez faire is not from a logical point of view 
an essential article of the utilitarian creed. A benevolent despot 
might enforce upon his people laws which, though they might 
diminish individual liberty, were likely, nevertheless, to ensure the 
well-being of his people. Yet laissez-faire was practically the mO'St 
vital part of Bentham's doctrine. Benthani perceived that under a 
system of ancient customs modified by hap-hazard legislation, un- 
numbered restraints were placed on the actions oi individuals, 
which were in no sense necessary for the safety and good order of 
the community at large, and he inferred at once that these re- 
straints were evils. Consequently we have from him the eulogy 
of laissez-faire. But with him and his disciples it was a totally dif- 
ferent thing froim easy acquiescence in the existing conditions of 
life. It was a war-cry. It sounded the attack upon every restric- 
tion, not justifiable by some definite and assignable reason of utility. 

From these three guiding principles O'f legislative utilitarianism — 
the scientific character of sound legislation, the principle of utility, 
faith in laissez-faire — English individualists have in practice deduced 
the two corollaries : that the law ought to extend tO' the sphere and 
enforce the obligation of contracts; and that, as regards the pos- 
session of political power, every man ought tO' count for one and no 
man count for more than one. Each of these ideas has been con- 
stantly entertained by men whoi have never reduced it to a formula 
or carried it out to its full logical result ; each of these two ideas has 
profoundly influenced modern legislation. 

70. The Authoritative Basis of the Laissez-Faire Concept. 

BY WALTON H. HAMILTO'N. 

There is nothing novel in the assertion that deference to author- 
ity is the most persistent and fundamental of the many aspects of 
the intellectual attitude, laissez-faire. True it is that the expression 
carries the idea of an industrial regime going its way, untrammeled 
by state interference. In fact its most obvious meaning seems to 
be a policy under which the individual shall be legally free to 
select his own occupation, choose his own business associates, em- 
ploy an industrial technique and organization which is to his own 
liking, and buy his materials and labor and market his wares on 



ii6 READINGS IN ECONOMIC PROBLEMS 

terms voluntarily made. Thus it means freedom for the individual 
in the immediate conduct O'f his business and the sale of his wares. 

But it does not totally exclude authority. Many advocates of 
laissez-faire see nothing amiss in governmental grants of public 
lands, subsidies, patents, or franchises. Many would permit the 
state to levy customs duties intended to check importations, raise 
prices, and increase the number of those engaged in protected in- 
dustries. All would allow the state tO' encourage commerce by im- 
proving transportation and credit facilities. It is perhaps not an 
overstatement to say that the advocate of laissez-faire regards as 
interference, not all political activity affecting industry, but only such 
as adversely affects business interests. Instances such as the above, 
however, are only passing phases of the situation. Penetrating and 
conditioning industrial activity at every point there is a tangled 
web of legal, political and social institutions. Among the legal in- 
stitutions are the prohibition of physical violence in industrial ac- 
tivity, a recognition of private property rights, machinery for com- 
pelling the discharge of obligations voluntarily assumed, and pre- 
scribed forms for partnerships and corporations. Among the 
social institutions are a system of intangible and immjaterial prop- 
erty rights, the manifestations of public and class opinion, a code of 
business ethics, and a system of collective action and the recog- 
nition of collective authority in individual industrial establishments. 
Upon these the advocate O'f laissez-faire of necessity takes an atti- 
tude. Since these institutions change slowly and are conceived 
of as indispensible, they have generally been regarded by the 
business man as a part of the unchangeable nature of things. There- 
fore laissez-faire formally says nothing about them. Yet its very 
silence is the best evidence of its unqualified approval of habitual 
legal and social institutions and its demand that the individual he j) ^ 
hedged about with conventional authorit}/. 

Not only is the province from which authorit}^ is excluded a 
narrow one, but even in that province laissez-faire is conceived 
of as a m,ere means for securing some desirable social end. Neither 
theorist nor layman, in formulating his reasons for supporting 
this policy, declares himself in favor of a purely acquisitive system, 
wherein the strong shall wax stronger at the expense of the weak. 
By the older school, whose aspirations for society were democratic, 
it was argued that the competitive struggle, under laissez-faire, 
resulted in the greatest good, not only to the highly successful few, 
but to every member of the social community. By the newer school 
the basis of whose theories is biological, and whose ideal is aris- 
tocratic, its justification is found in the elimination of the unfit, 



SOCIAL CONTROL OP INDUSTRY ny 

the perpetuation of the fit, and the tendency of society towards 
a higher cultural level. By some of the latter charity is 
strongly condemned, not hecause it strips the fit of some of the 
earnings which the industrial struggle has brought him, but because 
the survival of dependants tends to lower the prevailing type of 
civilization. IntO' the merits oi these theories this is not the place 
to go. Here it is enough to note that even its most extreme advo- 
cates do not conceive of laissez-faire as a theory of predation, nor 
seek to justify it by any benefits, however great, which it may con- 
fer on the individual. On the contrary, over and above him, a con- 
scious social end is set up, to the realization of which his activities 
must tend, and in view of which the policy itself is tO' be approved 
or condemned. 

71. The Unscientific Character of Laissez-Faire. 

BY J. E. CAIRNES. 

Political Economy has to do with wealth. But what is the 
problem concerning wealth which it undertakes to solve? I think 
the prevailing notion is that it undertakes to show that wealth may 
be most rapidly increased and most fairly distributed, by the simple 
process of leaving people tO' follow the promptings of self-interest 
unrestrained either by the State or by public opinion. That is the 
doctrine of laissez-faire. I shall endeavor to show that the maxim 
of laissez-faire has no scientific basis whatever, but is at best a mere 
handy rule of practice. 

If the doctrine of laissez-faire is to be taken as a scientific prin- 
ciple, its implied assertion is this : that, taking human beings as they 
are, in their intellectual and physical surroundings, and accepting 
the institution of private property as commonly understood, the 
promptings of self-interest will lead individuals, in all that range 
of their conduct which has to do with their material wellbeing, 
spontaneously to follow that course which is most for their own 
good and for the good of all. You will at once see that it involves 
the two following assumptions: first, that the interests of indi- 
viduals are fundamentally the same, secondly, that individuals know 
their interests in the sense in which they are coincident with the in- 
terests of others, and that, in the absence of coercion, they will in 
this sense follow themi. If these two propositions be made out, the 
policy of laissez-faire follows with scientific rigour. But can they 
be made out? For my part I am disposed to accept the first one, 
that human interests, well understood, are fundamentally at one. 
But how as to this assumption that people know their interests in 



1 18 READINGS IN ECONOMIC PROBLEMS 

the sense in which they are identical with the interests of others, 
and that they spontaneously follow them in this sense? The advo- 
cates of laissez-faire usually argue that human interests are natur- 
alh^ harmonious ; therefore we have only tO' leave people free, and 
social harmony will result ; as if it were an obvious thing that people 
know their interests in the sense in which they coincide with the 
interests of others, and that knowing them, they must follow them, 
as if there were no such things in the world as passion, prejudice, 
custom, esprit de corps, class interest, to draw people aside from 
the pursuit of their interests in the largest and highest sense ! Here 
is the fatal flaw on the very threshold of the argument. Nothing 
is easier than to show that people follow their interest, in the sense 
in which they understand their interest. But between following 
their interest in this sense and in the sense in which it is coincident 
with the interests of other people, a chasm yawns. That chasm 
in the argument of laissez-faire has never been bridged. 

To come to the important point, what is it that people under- 
stand to be their interests? What did landlords, as a class, under- 
stand to be their interests down to 1846, when they maintained the 
Corn Laws as indispensable to their rents, and the prop of their 
political power? What do Irish landlords understand to be their in- 
terests when they are withheld only by fear of assassination from 
evicting their tenants to consolidate their estates? What did em- 
ployers in former days understand tO' be their interests when they 
enacted statutes of laborers? Or, in more recent times, when a 
ten hours' act became necessary to- protect women and children 
against the unscrupulous pursuit of gain? I ask if any one can 
seriously consider the state of things represented by these examples, 
and retain absolute confidence in his maxim of laissez-faire? 

The truly significant circumstance is that the policy expressed 
by laissez-faire has been steadily progressive for nearly half a 
century, and yet we have no' sign of mitigation in the harshest 
features of our social state. Those ugly social features, those violent 
contrasts of poverty and wealth, that strike so unpleasantly the eye 
Oif every foreign observer in this country, are still painfully prom- 
inent. In a word, "the grand final result, the indefinite approxi- 
mation of all classes towards a level which is always rising," seems 
as yet scarcely nearer. This seems tO' me to^ abate our confidence! 
in laissez-faire as the panacea for industrial ills. 

There is no- evidence to warrant the assumption that lies at the 
root of this doctrine. Human beings follow their interests according 
to their delights and dispositions; but not necessarily in that sense 
in which the interest oi the individual is coincident with that of 



SOCIAL CONTROL OP INDUSTRY 



119 



others or of the whole. It follows that there is no' security that the 
economic phenomena of society will always arrange themselves 
spontaneously in the way that is most for the common good. In 
other words laissez-faire falls to the ground as a scientific doctrine. 
At best it is a practical rule and not a doctrine of science. I^ike 
most other practical rules, it is open to numierous exceptions. 
Above all, it must never for a moment be allowed to stand in the 
way of the candid consideration of any promising proposal of 
social or industrial reform. 

72. How Laissez-Faire has Worked out in Practice. 

BY L. T. IIO'BHOCJSE. 

In the main, the teaching of the school tended to a restricted 
view of the function of government. Government had to maintain 
order, to restrain men from violence and fraud, to hold them secure 
in person and property against foreign and domiestic enemies, that 
they may rely upon reaping where they have sown, and may enjoy 
the fruits of their industry. 

The factory system early brought matters to a head at one 
point by the systematic employment of women and young children 
under conditions which outraged the public conscience when they 
became known. In the case of children it was admitted that the 
principle of free contract could not apply. It left the child toi be 
exploited by the employer in his own interest. But this principle 
admitted of great extension. If the child was helpless, was the 
grown-up person, man or woman, in a much better position ? Here 
was the owner of a mill employing five hundred hands. Here was 
an operative possessed oi no- alternative means of subsistence seek- 
ing employment. Suppose them to- bargain as to terms. If the 
bargain failed the employer lost one man. At worst he miight have 
a little difficulty for a day or two in working a single machine. 
During the same days the operative might have nothing to eat, 
and might see his children going hungry. Where was the efifective 
liberty in such an arrangement? In the matter of contract true 
freedom postulates substantial equality between the parties. In pro- 
portion as one party is in a position of advantage he is able to 
dictate the terms. In proportion as the other party is in a weak 
position, he must accept unfavorable terms. Hence the truth of 
Walker's dictum that economic injuries tend tO' perpetuate them- 
selves. For purposes of legislation the state began with the child, 
where the case was overwhelming. It went on to include the young 
person and the woman. It drew the line at the adult male, and 



I20 READINGS IN ECONOMIC PROBLEMS 

it is only within our own tim:e that legislation has avowedly under- 
taken the task oi controlling the conditions of industry. To this it 
has been driven by the manifest teachings of experience that liberty 
without equality is a name of noble sound and squalid result. 

In place of the S3^stem of unfettered agreement contemplated, 
the industrial system) which has actually grown up' and is in pro- 
cess of further development rests on conditions prescribed- by the 
state. The law provides for the safety of the worker and sanitary 
conditions of empdoyment. It prescribes the length of the working 
day for women and children. In the future it will probably deal 
freely with the hours for men. It makes employers liable for in- 
juries sulTered by operatives. Within these limits it allows freedom 
of contract. 

The theory of laissez-faire asumed that the state would hold 
the ring. It would supress force and fraud, keep property safe, and 
aid men in enforcing contracts. On these conditions men should 
be absolutely free to compete with each other, so that their best 
energies should be called forth. But why, on these conditions, just 
these, and no others? Why should the State insure protection of 
person and property? The time was when the strong man armed 
kept his goods, and incidentally his neig^hbor's goods too, if he could 
get hold of them. Why should the State intervene io do for a 
man that which his ancestors did for themselves? Why should a 
man who has been soundly beaten in physical fight gO' tO' a public 
authority for redress ? How much more manly to fight his own battle. 
Was it not a kind of pauperization to make men secure in person 
and property, through nO' efforts of their own, by the agency of a 
state machinery operating over their heads? Would not a really 
consistent individualism abolish this machinery? "But," the advo- 
cate of laissez-faire may reply, "the use of force is criminal, and 
the state must suppress crime." So men held in the ninteenth cen- 
tury. But there was an earlier time when they did not take this 
view, but left it to individuals and their kinsfolk to revenge their 
own injuries. Was not this a time of more unrestrained indi- 
vidual liberty. On what principle then is the line drawn, sO' as to 
specify certain injuries which the State may prohibit and to mark 
off others w'hich it must leave untouched? 

Individualism as ordinarily understood, not only takes the police- 
man and the law court for granted. It also takes the rights of 
property for granted. But what is meant by the rights of property ? 
In ordinary use the phrase means just that system tO' which long 
usage has accustomed us. This is a system by which a man is free 
to acquire by any method of production or exchange, within the 



SOCIAL CONTROL OF INDUSTRY 121 

limits of the law whatever he can oi land, consumable goods, or 
capital ; to dispose of it at his own will and pleasure for his own 
purposes, to destroy it if he likes, to give it away or sell it as it 
suits him, and at death tO' bequeath it to whomsoever he will. The 
State can take a part of a man's property by taxation. But in all 
taxation the State is taking something from a man which is "his," 
and in so doing is justified only by necessity. In many ways, in 
the face of actual conditions, the individualist has been driven to a 
change in property rights in the direction of greater social control. 
The school of Henry George, individualists though thej^ be, would 
purge the social system oi the private ownership of land. This 
alone, say they, will insure genuine freedom to all individuals. 

Thus individualism, when it grapples with the facts, is driven no 
small distance towards state regulation. Once again we have found 
that to maintain individual freedom and equality we have to extend 
the sphere of social control. We cannot assume any of the rights 
of property as axiomatic. We must look at their actual workings 
and consider how they affect the life of society. 



E. THE LIMITS OF THE PROVINCE OF GOVERNMENT. 

73. The Individualistic Conception of the Province of Govern- 
ment. 

BY JOHN STUART MII^Iv. 

We have now reached the question to what objects governmental 
intervention in the affairs of society may or should extend. The 
supporters of interference 'have been content with asserting a gen- 
eral right and duty on the part of government to intervene, where- 
ever its intervention would be useful ; and when those who have 
been called the laissez-faire school have attempted any definite lim- 
itation of the province O'f government, they have usually restricted 
it to the protection of person and property against force and 
fraud ; a definition to which neither they nor any one else can delib- 
erately adhere, since it excludes some of the most indispensable and 
unanimously recognized of the duties of government. Whatever 
theory we adopt respecting the foundation of the social union, and 
under whatever political institutions we live, there is a circle around 
every individual human being, which no government, be it that of 
one, or a few, or of the many, ought tO' be permitted to overstep: 
there is a part of the life of every person who' has come to- years 
of discretion, within which the individuality oi that person ought to 



122 



READINGS IN ECONOMIC PROBLEMS 



reign uncontrolled either by any other individual or by the public 
collectively. That there is, or ought to be, some space in human 
existence thus entrenched around, and sacred from authoritative 
intrusion, no one who professes the smallest regard to human free- 
dom or dignity will call in question. 

Even in those portions of conduct which do affect the interest 
of others, the onus of making out a case always lies on the defend- 
ers of legal prohibitions. It is not a merely constructive or presump- 
tive injury to others, which will justify the interference of law with 
individual freedom. To be prevented from doing what one is in- 
clined to, or from acting according to one's own judgment of what 
is desirable, is not only always irksome, but always tends to starve 
the development of some portion of the bodily oi' mental faculties, 
either sensitive or active ; and unless the conscience of the individual 
goes freely with the legal restraint, it partakes, either in a great or 
in a small degree, of the degradation of slavery. 

A second general objection to government agency is that every 
increase of the functions developing on the government is an in- 
crease of its power, both in the form of authority, and still more, in 
the indirect form of influence. The public collectively is abundantly 
ready to impose, not only its generally narrow views of its interests, 
but its abstract opinions, and even its tastes, as laws binding upon 
individuals. And the present civilization tends so strongly to make 
the power of persons acting in masses the only substantial power in 
society, that there never was more necessity for surrounding indi- 
vidual independence of thought, speech, and conduct, with the most 
powerful defences. Hence it is no less important in a democratic 
than in any other government, that all tendency on the part of publia 
authorities to stretch their interference should be regarded with un- 
remitting jealousy. 

A third general objection to government agency rests on the 
principle of the division of labour. Every additional function un- 
dertaken by the government is a fresh occupation imposed upon a 
body already overcharged with duties. A natural consequence is 
that most things are ill done; much not done at all, because the 
government is not able to do it without delays which are fatal to 
its purpose. 

I have reserved for the last place one of the strongest of the 
reasons against the extension of government agency. Even if the 
government could comprehend within itself, in each department, all 
the most eminent intellectual capacity and active talent of the nation, 
it would not be the less desirable that the conduct of a large portion 
of the affairs of society should be left in the hands of the persons im- 



SOCIAL CONTROL OF INDUSTRY 123 

mediately interested in them,. A people among whom there is no 
habit of spontaneous action for a collective interest whO' look habit- 
ually to their government to command or prompt them in all matters 
of joint concern have their facudties only half developed; their edu- 
cation is defective in one of its most important branches. There 
cannot be a combination of circumstances more dangerous to human 
welfare than that in which intelligence and talent are maintained 
at a high standard within a governing corporation, but starved and 
discouraged outside the pale. Few will dispute the more than suffic- 
iency oi these reasons, to throw, in every instance, the burden of 
making out a strong case, not on those who- resist, but on those who 
recommend government interference. Laissez-faire, in short, should 
be the general practice ; every departure from it, unless required by 
some great good, is a certain evil. 

But we must now turn to the second part of our task, and direct 
our attention to cases, in which some of those general objections are 
altogether absent, while those which can never be got rid of entirely 
are overruled by counter-considerations of still greater importance. 

Can it be affirmed, for instance, that the consumer is the most 
competent judge of the end? Is the buyer always qualified to judge 
of the commodity? The proposition can be admitted only with nu- 
merous abatements and exceptions. This is peculiarly true of those 
things which are chiefly useful as tending to raise the character of 
human beings. The uncultivated cannot be coirupetent judges of 
cultivation. Those who- most need to be made wiser and better 
usually desire it least, and if they desired it, would be incapable of 
finding the way to it by their own lights. In the matter of educa- 
tion, the intervention of government is justifiable, because the case 
is not one in which the interest and judgment of the consumer are 
a sufficient security for the goodness of the commodity. Let us now 
consider other cases, where, for one reason or another, governmental 
interference is necessary. These may be classed under several heads. 

First, the individual who is presumed to be the best judge of 
his own interests may be incapable of judging or acting for him- 
self ; may be a lunatic, an idiot, an infant ; or, though not wholly 
incapable, may be of immature years and judgment. In this case 
the foundation of the laissez-faire principle breaks down entirely. 
The person most interested is not the best judge of the matter, nor 
a competent judge at all. To' take an example fronn the peculiar 
province of political economy; it is right that children, and young 
persons not yet arrived at maturity, should be protected, so far as 
the eye and hand of the state can reach, from being over-worked. 
Freedom of contract, in the case of children, is but another word 



1.24 READINGS IN ECONOMIC PROBLEMS 

for freedom of coercion. Education also is not a thing- which par- 
ents or relatives' should have it in their power to withhold. But the 
classing together, for this and other purposes, of women and chil- 
dren, appears to me both indefensible in principle and mischievous 
in practice. Children below a certain age cannot judge or act for 
themselves, but women are as capable as men of appreciating and 
managing their own concerns, and the only hindrance tO' their doing 
so arises from the injustice of their present social position. If women 
had as absolute a control as men have over their own persons and 
their own patrimony or acquisitions, there would be no plea for 
limiting their hours of labouring for themselves, in order that they 
might have time to labour for the husband, in what is called, by the 
the production of a state of things favorable to the welfare of the 
advocates of restriction, his home. Women employed in factories 
are the only women in the labouring rank of life whose position is 
not that of slaves and drudges. 

A second exception to the doctrine that individuals are the best 
judges of their own interest, is when an individual attempts to decide 
irrevocably now what will be best for his interest at some future and 
distant time. The practical maxim of leaving contracts free is not 
applicable without great limitations in case of engagements in per- 
petuity; and the laW should be extremely jealous of such engage- 
ments. 

The third exception which I shall notice has reference to the 
great class of cases in which the individuals can only manage the 
concern by delegated agency, and in which the so-called private man- 
agement is, in point of fact, hardly better entitled to be called man- 
agement by the persons interested, than administration by a public 
officer. Whatever, if left to spontaneous agency, can only be done 
by joint stock associations, will O'ften be as well, and sometimes bet- 
ter done, as far as the actual work is concerned, by the state. Gov- 
ernment management is, indeed, proverbially jobbing, careless, and 
ineffective, but so likewise has generally been joint-stock manage- 
ment. 

To a fourth cause of exception I must request particular atten- 
tion, it being one to which, as it appears to me, the attention of 
political economists has not yet been sufficiently drawn. There are 
matters in which the interference of law is required, not to overrule 
the judgment of individuals respecting their own interest, but to 
give effect to that judgment; they being unable to give effect to it 
except by concert, which concert again cannot be effectual unless 
it receives validity and sanction fromi the law. For illustration I 
may advert to the question of diminishing the hours of labour. Let 



SOCIAL CONTROL OP INDUSTRY • 125 

us suppose that a general reduction of the hours of factory labour, 
say from ten to nine, would be for the advantage of the work people ; 
that they would receive as high wages, or nearly as high, for nine 
hours' labour as they receive for ten. If this would be the result, 
and if the operatives generally are convinced that it would, the lim- 
itation, some may say, will be adopted spontaneously. I answer, 
that it will not be adopted unless the body of operatives bind them- 
selves to one another to abide by it. For however beneficial the ob- 
servance of the regulation might be to the class collectively, the 
immediate interest of every individual would lie in violating it : and 
the more numerous those were who adhered to the rule, the more 
would individuals gain by departing fronn it. 

Fifthly ; the argument against government interference ground- 
ed on the maxim that individuals are the best judges of their own 
interest, cannot apply to the very large class of cases, in which 
those acts of individuals with which the government claims to in- 
terfere, are not done by those individuals for their own interest, but 
for the interest of other people. This includes, among other things, 
the important and much agitated subject of public charity. Though 
individuals should, in general, be left to do for themselves whatever 
it can reasonably be expected that they should be capable of doing, 
yet when they are at an}^ rate not to be left tO' themselves, but to- 
be helped by other people, the queston arises whether it is better that 
they should receive this help exclusively from individuals, and there- 
fore uncertainly and casually, or by systematic arrangements, in 
which society acts through its organ, the state. Other cases, falling 
within the same general principle, are those in which the acts done 
by individuals, though intended solely for their own benefit, involve 
consequences extending indefinitely beyond them, to interests of the 
nation or of posterity, for which society in its collective capacity is 
alone able, and alone bound, to provide. 

The same principle extends also to- a variet}^ of cases, in which 
important public services are to be perform.ed, while yet there is no 
individual specially interested in performing them, nor would any 
adequate remuneration naturally or spontaneously attend their per- 
formance. Take for instance a voyage of geographical or scientific 
exploration. It may be said, generally, that anything which it is 
desirable should be done for the general interests of mankind or of 
future generations, or for the present interests of those members 
of the community who require external aid, but which is not of a 
nature to remunerate individuals or associations for undertaking it, 
is in itself a suitable thing to be undertaken by government. 

The preceding heads comprise, to the best of my judgment, the 



126 READINGS IN ECONOMIC PROBLEMS 

whole of the exceptions to the practical maxim that the husiness of 
society can be best performed by private and voluntary agency. It 
is, however, necessary tO' add, that the intervention of government 
cannot always practically stop short at the limit which defines the 
cases intrinsically suitable for it. In the particular circumstances of 
a given age or nation, there is scarcely any thing, really important 
to the general interest, which it may not be desirable, or even neces- 
sary, that the government should take upon itself. Even in the 
best state which society has yet reached it is lamentable to think how 
great a proportion of all the efforts and talents in the world are 
employed in merely neutralizing one another. It is the proper end 
of government to reduce this wretched waste to^ the smallest possi- 
ble amount, by taking such measures as shall cause the energies now 
spent by mankind in injuring one another, or in protecting them- 
selves against injury, to be turned to the legitimate employment of 
the human faculties, that of compelling the powers of nature to be 
more and more subservient to physical and moral good. 

74. The Collectivistic Conception of the Province of Govern- 
ment. 

BY ALBERT V. DICEY. 

The fundamental principle accepted by every man who leans 
towards any form of socialism is faith in the benefit to be derived 
by the mass of the people from the action or intervention of the 
State even in matters which might be left to the uncontrolled man- 
agement of the persons concerned. This doctrine involves two as- 
sumptions : the one is a denial that laissez faire is in most cases a 
principle of sound legislation ; the second is a belief in the benefit 
of governmental guidance, even when it greatly limits the sphere of 
individual liberty. The importance of the general, even though 
tacit acceptance of this doctrine, lies in the support which it has 
given to certain suboirdinate principles which immediately afifect 
legislation. These may be conveniently considered under four 
heads : the Extension of the idea of Protection, the Restriction on 
Freedom of Contract, the Preference for Collective as contrasted 
with Individual Action, and the Equalisation of Advantages among 
individuals. 

I. Let us consider the extension of the idea and the range of 
protection. The most fanatical of individualists admits the exist- 
ence of persons, such as infants or madmen, who need the special 
protection of the State. The most thoroughgoing individualists 
even insist that for certain purposes all persons need state protec- 



SOCIAL CONTROL OF INDUSTRY 



127 



tion, e. g., for the prevention of assaults by robbers. Such protec- 
tion is in defence of individual liberty, and is therefore an applica- 
tion of the individualistic creed. Protection, however, may acquire 
a far wider signification. It is extended in two different ways. In 
the first place, it is tacitly transformed into "guidance," and is ap- 
plied to classes who are, in the opinion of the legislature, unlikely 
to provide as well for their own welfare as can the community. 
Women's labor and even men's labor are in many cases regulated by 
law. The State confers protection on many classes. And modern 
legislation tends to increase the number of protected classes. Pro- 
tection is also made to include arrangements for safeguarding all 
citizens against mistakes which often can not be avoided by a man's 
care and sagacity. Laws against food adulteration rest upon the 
idea that the State is a better judge than the man himself of bis own 
interest. 

II. Collectivism curtails as surely as individualism extends the 
area of contractual freedom. The reason is obvious. Extension of 
contractuar capacity enlarges the sphere of individual liberty. Ac- 
cording as legislators do or do not believe in leaving each man to 
settle his own affairs, they will try to extend or limit the sphere of 
contractual freedomi. During the latter part of the nineteenth cen- 
tury the tendency to curtail such liberty became clearly apparent. 
The transition from permissive to compulsory legislation bears wit- 
ness to the same rising influence of collectivism^. 

Ill; Next is the preference for collective over individual action. 
This preference rests upon two grounds. The one is the belief that 
whenever the interest of the wage-earners comes into competition 
with the interests of capitalists, and especially as to the rate of 
wages, an individual laborer does not bargain on fair terms ; he 
seems powerless against a wealthy manufacturer, and still more so 
against a large company possessed of wealth, which, as compared 
with his own resources, may be regarded as unlimited. The other 
ground is the sentiment entertained by every collectivist that an 
individual probably does not know his own interest, and certainly 
does not know the interest of the class to which he belongs as well 
as the trade union, or the State. The belief that associations or 
communities are organisms, which may be wiser as well as stronger 
than the persons of whom they are composed, affects a man's whole 
estimate of the merit O'f combined as compared with individual 
action, and underlies nuich modern legislation. This tendency is 
reflected in the legal system in relation to^ the recognition of the right 
of laborers to combine. 



128 READINGS IN ECONOMIC PROBLEMS 

IV. The extension given by collectivists to the idea of protec- 
tion makes easy the transition from that idea to the different notion 
of the equalization of advantages. Of the members of every com- 
munity tlie greater number cannot obtain the comforts or the en- 
joyments which fall tO' the lot of their richer neighbors. Against the 
evil O'f poverty the State ought, it is felt by collectivists, to protect 
the wage-earning class, and, in order to give this protection, must 
go a good way towards securing for every citizen something like 
the same advantages, in the form of education, or of physical well- 
being, as the rich can obtain by their own efforts. This has not as 
yet led to that enforced equality known as communism, but, during 
the latter part of the nineteenth century, it has produced much leg- 
islation tending towards that equalization of advantages among all 
classes which means the conferring of benefits upon the wage- 
earners at the expense of the whole body of tax-payers. This ten- 
dency is traceable in the law with respect to elemientary education, 
in employers' liability laws, and in legislation relating to non-em- 
ployment. 

The difference between the legislation characteristic of the era 
of individualism and that of collectivism is essential and fundamen- 
tal. The dissimilarity rests upon and gives expression to different 
ways of regarding the relation between man and the State. Lib- 
erals have looked upon men mainly as separate persons, each of 
whom must, by his own eiforts, work out his own happiness and 
well-being; and have held that the prosperity of the community 
means nothing more than the prosperity of the whole or a majority 
of its members. They have also assumed, and surely not without 
reason, that if a man's real interest be Avell understood, the true 
welfare of each citizen means the true welfare of the State. Hence 
Liberals have promoted legislation which should increase each citi- 
zen's liberty, energy, and independence; and which should intensify 
his sense of individual responsibility for results, whether as regards 
himself or his neighbors, of his personal conduct. 

Collectivists, on the other hand, have looked upon men mainly, 
not so much as isolated individuals, but as beings who by their very 
nature are citizens and parts of the great organism — the State — 
whereof they are members. They have felt that the happiness of 
each citiz;ien depends upon the welfare of the nation, and have held 
that to insure the welfare of the nation is the only way of promot- 
ing the happiness of each individual citizen. Hence collectivists 
have fostered legislation which should increase the force of each 
man's social and sympathetic feelings, and should intensify his sense 



SOCIAL CONTROL OF INDUSTRY 



129 



of the responsibility of society for the welfare or happiness of each 
individual citizen. The force of collectivism is not spent. The inner 
logic of events leads tO' the extension and development of legislation 
Which bears the impress of collectivism. 



F. ASPECTS OF THE MOVEMENT FOR SOCIAL 
CONTROL. 

75. A Refutation of the Evolutionary Argument against Social 

Reform. 

BY W. L-YON BLRASK. 

The philosophical argument against Social Reform which has 
most weight is that by helping individuals the State deprives them 
of the disposition to help themiselves, and they tend to rely more and 
more upon the social organization and less and less upon themselves. 
Everything in the way of public assistance is thus regarded with 
suspicion. To feed school-children is to weaken parental responsi- 
bility. To raise wages by legislation is as demoralizing as to dis- 
tribute doles. To' offer a pension of five shillings a week in old age 
is to discourage thrift in youth. It is therefore better in the end 
that poverty should be allowed to run its course than that a mis- 
directed benevolence should demoralize the people. This argument, 
reproducing the logical individualism of the Utilitarians, has been 
greatly strengthened by Darwinism. Herbert Spencer has thus 
applied the theory of evolution to political affairs. "The well-being 
of existing humanity, and the unfoldng of it into ultimate perfection, 
are both secured through the same benificent, though severe, disci- 
pline to which the animate creation at large is subject; a felicity- 
pursuing law which never swerves for the avoidance of partial and 
temporary suffering. The poverty of the incapable, the distresses 
that come upon the imprudent, the starvation of the idle, and those 
shoulderings aside of the weak by the strong, which leave so many 
in shallows and in miseries, are the decree of a large, far-seeing 
benevolence." 

Yet, if there is one thing that most distinguishes modern from 
ancient society, and society of any kind from the disorganized exist- 
ence of primitive man, it is the prevalence of the idea that we are, 
in some measure, respousible for the condition of our neighbors. 
If the course of past development is any guide, we may be certain 
that unless we take steps to alter our condition, we shall certainly 
continue in the same course in the future. It would be at least sur- 



I30 READINGS IN ECONOMIC PROBLEMS 

prising that the salvation of the race should now be found to lie 
in a deliberate reaction, against the movemient of countless ages, 
towards the state of undisciplined human egotism. A doctrine so 
repugnant to what we have been accustomed tO' regard as our better 
feelings requires little examination to discover its fallacies. 

The evolutionary argument against Social Reform falls to the 
ground when it is once admitted that the individuals in contempla- 
tion are individuals organized in society, and that it is only so long 
as they are organized that development, as we understand it, can 
take place. If. mankind were left to< scramble for such good things 
as it could get without cooperation, the race would no doubt, in 
course of time, develop such characteristics as that competition 
would allow to survive. But if we erect higher standards, and re- 
quire, even from selfish motives, the moral, intellectual, and physical 
benefits which only organization, culture, and the communication of 
ideas will produce, the comparison between human beings and the 
rest of the animate creation is useless for our purpose. Some limit- 
ation of the struggle for existence is obviously needed, if we are 
not to fall back to the level where only the brute qualities of strength, 
swiftness, and cunning are of value. Once we admit the need of a 
social organization, which involves a very considerable check on 
mechanical evolution by the survival of the fittest, the only con- 
troversy is about the extent and character of the limits on competi- 
tion and not about their existence. 

But the argument for Social Reform is not based only upon the 
possibility of altering environment so that individuals who are unfit 
for it may maintain themselves as long as they live. It is not the 
incapable who are poor. It is not only the imprudent who are over- 
come by distress. It is not only the idle who starve. Bad conditions 
of life destroy not only the inefficient, but the efficient. He is a 
very dull and stupid observer who supposes that all the slovenly, 
debauched, and criminal men and women whom he sees around him 
are what they are because of their innate qualities. A bad environ- 
ment does not merely destroy the inefficient, it manufactures them ; 
and it is as reasonable to oppose social reform' because it prevents 
the elimination of the unfit, as it would be to defend excessive eating 
and drinking, or sitting in wet clothes. Unhealthy eating would no 
doubt destroy people with weak stomachs, but for every one who 
perished in this struggle with environment there would be ten who 
survived. Bad housing and bad wages produce the same results as 
bad habits. An ill-fed girl becomes the mother of weakly children. 
Casual labor kills only after it has given birth to an incalculable 



SOCIAL CONTROL OF INDUSTRY 



131 



amount oi laziness, vice, and mental disorder. The elimiination of 
the unfit is uncertain and capricious. The deterioration of the fit 
is certain and remorseless. Reform is thus the only possible means 
for discovering- what individuals are fit in the human sense. It is 
only when all have a chance of survival that we can distinguish 
between efficient and inefficient. The reformer need have no' fear 
that his generous impulses are signs of an anti-social sentimental- 
ism. He is in fact only Evolution conscious of itself. 

This elaboration of social control is not inconsistent with such 
competition as is necessary for the development of character, and 
for the production of the wealth v/hich is distributed among the 
members of society. It is not Socialism. It removes only some of 
the risks of failure, and only those which are beyond individual con- 
trol. No man is made less thrifty because at the age of seventy he 
will receive five shillings a week. No man works the better for 
knowing that, if he is ever ill for a month, he and his family will 
never be free again, or will work the worse for knowing that his 
home will be kept together until he is able once more to support it 
by his own exertions. No woman gets any virtue out of working 
fifteen hours a day -for seven days a week, with the knowledge that 
even then she will not earn enough to keep herself in food and cloth- 
ing without recourse to charity or prostitution, and her character 
will not be deteriorated when a level is fixed below which her wages 
cannot fall. The benefit of competition remains. The disasters in- 
evitably attendant on it are averted. The poorer people no longer 
wrestle on the brink of an unfenced precipice. We do not want to 
see impaired the vigor of competition, but we can do much to miti- 
gate the consequences of failure. We want to^ draw a line below 
which we will not allow persons tO' live and labor. We want to have 
free competition upward. We do not want to pull down the struc- 
tures of science and civilization ; but to spread a net over an abyss. 
Our aim is not to abolish competition. Competition will always be 
powerful enough. But to limit the strife — to fix a ring around the 
prize-fight — to protect the vital parts from the blows of the com- 
batants. Individual growth can only take place in competition. But 
it is not necessary that failure in competition should be mortal. The 
struggle of competition is to go on. But it is not to go on to the 
death. Economiic society is to be converted into a gigantic Trade 
Union, based upon the belief that the highest good of the individual 
can only be secured in cooperation with his fellows, and limiting 
his freedom only in so far as it is necessary to^ secure freedom to 
his associates. 



1.32 READINGS IN ECONOMIC PROBLEMS 

76. The Futility of Utopian Legislation. 

BY GEORGE CHATTERTON-HILI.. 

It is essential for the welfare of society that its evolution should 
keep pace with the rate of changfe in the environing conditions. 
Should the environment change more rapidly than the society is 
capable of changing, the extinction of society must follow. The 
rate of evolution in society must conformi to the possibilities and also 
to the needs of that society. All legislation must take into consid- 
eration not merely the traditions of the past, but alsoi the facts of 
the present. And the balance of power between the various com- 
ponent elements oi a society, which is an undoubted fact of every 
''present," must be the chief consideration of ever}^ legislator. The 
traditions of the past must only be taken into consideration in so 
far as they are also- elements of resistence to^ reform in the present, 
for it is the duty of the social reformer to take into consideration 
the elements of resistence tO' every project of reform. It is upon the 
measure of resistence that may be expected to it that the possibility 
of every reform depends. Generous utopianists would fain see a 
number of reforms enacted, some of which would certainly be of use 
to society at large ; but they forget the usefulness of a reform is no 
guarantee of its popularity, for prejudice and tradition are stronger 
than any appreciation of the real needs of society. This ignoring 
at the present time of the elements of resistance is the chief reason 
of the failure of so many reform^ projects; and it is fatal to social 
legislation. 

But the traditions of the past must be neglected, except in so far 
as they may constitute an element of invincible resistance which con- 
demns a social reform project a priori. The realities of the present 
must occupy the first place in the mind of the legislator. Neglect of 
this condition leads to the making of impossible laws which take no 
account of the trend of social evolution. The prohibitive duty on 
corn passed in England in 18 15 by a Parliament representing almost 
exclusively the country aristocracy is an examiple oi this neglect of 
actual conditions. Here was England, already with a highly-de- 
veloped industry in which hundreds O'f thousands of working men 
were employed, placing a duty on foreign corn which rendered bread 
wellnigh unpurchasable for the great masses of the people in the 
interests of a small minority of landowners. 

This, and innumerable other instances, are examples of what we 
may call Utopian legislation — that is to say, legislation undertaken 
without any knowledge of the precise relations existing between the 
different elements in society, and which is at once futile in the pres- 



SOCIAL CONTROL OF INDUSTRY 133 

ent, and eminently productive of harm' in the future. It is of para- 
mount necessity to base social legislation on an adequate knowledge 
and appreciation of the factors within the society. The rapidity of 
social legislation must necessarily be proportionate tO' the needs of 
society; and the needs of society must be measured according to 
those of the great majority of that society. 

77. The Necessity of a New Social Basis in Law.* 

BY JUSTICE OUVER W. HOLMES. 

This case is decided upon an economic theory which a large part 
of the country does not entertain. If it were a question whether I 
agreed with the theory I should desire tO' study further and long 
before making up my mind. But I dp not conceive that to be my 
duty, because I strongly believe that my agreement or disagreement 
has nothing to do with the right of the majority tO' embody their 
opinion in law. It is settled that state constitutions and laws may 
regulate life in many ways that we as legislators might think inju- 
dicious, or if you like, as tyrannical as this, and which equally inter- 
fere with the liberty of contract. This liberty of the citizen to do 
as he likes so long as he does not interfere with the like liberty of 
others to do the same, which has been a shibboleth for many well- 
known writers, is interfered with by school laws,«by the Post Office, 
by every state and municipal institution which takes his money for 
purposes thought desirable, whether he likes it or not. The r4th 
Amendment does not enact Herbert Spencers Social Statics. A con- 
stitution is not intended to embody a particular economic theory, 
whether of paternalism and the organic relations of a citizen to the 
state, or of laissez-faire. It is made for people of fundamentally 
differing views. 

General propositions do not solve concrete problems. The decis- 
ion will depend on a judgment or intuition more subtle than any ar- 
ticulate major premise. Every opinion tends tO' become law. I 
think that the word liberty in the 14th amendment is perverted when 
it is held to prevent the natural outcome of a dominant opinion, un- 
less it can be said that a rational and fair minded man would neces- 
sarily admit that the proposed statute would infringe fundamental 
principles as they have been understood by the traditions and the 
laws of our people. 

* This is the famous bake-shop case. In this case a statute passed by the 
New York legislature, regulating the hours of labor in bake shops, was de- 
clared unconstitutional. This selection is an except from a dissenting opinion. 



134 READINGS IN ECONOMIC PROBLEMS 

78. The Logic of Social Reform. 

BY HI:RBERT CROIvY. 

Refoimiers have failed for the most part to reach a correct diag- 
nosis of existing political and economic abuses, because they are 
almost as much the victims of perverted, confused, and routine hab- 
its of political thought as the politicians. They have not eschewed 
the tradition that a patriotic American citizen must not in his politi- 
cal thinking go beyond the formulas consecrated in the sacred Amer- 
ican writings. Accordingly, all the leading reformers begin by 
piously reiterating certain phrases about equal rig^hts for all and spe- 
cial privileges for none, and of government of the people, by the 
people, and for the people. Having in this way proved their funda- 
mental political orthodoxy, they proceed to- interpret the phrases ac- 
cording to their personal, class, local, and partisan preconceptions 
and interests. They have never stopped to inquire whether the 
principle of equal rights in its actual embodiment in American iuh- 
stitutional and political practice has not been partly responsible for 
some of the existing abuses, whether it is either a safe or sufficient 
platform for a reforming movement, and whether its continued pro- 
clamation as the fundamental political principle of a democracy will 
help or hinder the higher democratic consummation. 

All Americans, .whether they are professional politicians or re- 
formers, "predatory" millionaires or common people, political phil- 
osophers or schoolboys, accept the principle of "equal rights for all 
and special privileges for none" as the absolutely sufficient rule for 
an American democratic political system. The platforms of both 
parties testify in its behalf. Corporation lawyers and their clients 
appear frequently to believe in it. Tammany offers tribute to it 
during every local campaign in New York. A Democratic Senator, 
in the intervals between his votes for increased duties on the pro- 
ducts of his state, declares it to be the summary of all political wis- 
dom. There is no extreme of radicalism or conservatism, of indi- 
vidualism or socialism, of Republicanism or Democracy, which does 
not rest its argument on this one consummate principle. 

Further, reform is both meaningless and powerless until the 
Jeffersonian principle of non-interference is abandoned. The ex- 
perience of the last generation plainly shows that the American 
economic and social system cannot be allowed to take care of itself, 
and that the automatic harmony of the individual and the public 
interest, which is the essence of the Jeffersonian creed, has proved 
to be an illusion. Interference with the natural course of individual 



SOCIAL CONTROL OF INDUSTRY 135 

and popular action must be in the public interest; and such inter- 
ference must be sufficient tO' accomplish its purposes. 

The reformers have come partly to realize that the Jeffersonian 
policy of drift must be abandoned. They no longer expect the 
American ship of state by virtue of its own righteous framework to 
sail away to a safe harbor in the Promised Land. They understand 
that there must be a vigorous and conscious assertion of the public 
as opposed to private and special interests, and that the American 
people must to a greater extent than they have in the past subordi- 
nate the latter to the former. They behave as if the American ship 
of state will hereafter require careful steering" ; and a turn or two at 
the wheel has given them sonne idea of the course they must set. 
But even the best of them have not learned the name of its ultimate 
destination, the full difficulties of the navigation, or the stern disci- 
pline which may eventually be imposed upon the ship's crew. They 
do not realize how thoroughly Jeffersonian individualism must be 
abandoned for the benefit of a genuine social consummation. 
And they do not realize how dangerous a craft their cherished prin- 
ciple of equal rights may have become. In reviving the principle of 
vigorous national action they have been looking in the direction of a 
much more trustworthy and serviceable political principle. The as- 
sumption of such a responsibility implies a rejection of a large part 
of the Jeffersonian creed, and a renewed attempt to establish in its 
place the popularity of its Hamiltonian rival. On the other hand 
it involves no less surely the transformation of Hamiltonianism into 
a thoroughly democratic political principle. This is hopeful in giv- 
ing a new meaning to the Hamiltonian system of political ideas and 
a new power to democracy. 

79. A Progiam of Social Reform. 

BY WOODROW WIUSO'N. 

We see that in many things our nationa] life is very great. It 
it incomparably great in its material aspects, in its body of wealth, 
in the diversity and sweep of its energy, in the industries which have 
been conceived and built up by the g-enius of individual men and the 
limitless enterprises of groups of men. 

It is great, also, very great, in its moral force. Nowhere else in 
the world have noble men and women exhibited in more striking 
forms the beauty and the energy of sympathy and helpfulness and 
counsel in their efforts to rectify wrong, alleviate suffering, and set 
the weak in the way of strength and hope. 

We have built up, moreover, a great system of government, 



136 READINGS IN ECONOMIC PROBLEMS 

which has stood through a long age as in many respects a model 
for those who seek to set liberty upon foundations that will endure 
against fortuitous change, against storm and accident. Our life 
contains every great thing, and contains it in rich abundance. 

But the evil has come with the good, and much of the fine gold 
has been corroded. 

With riches has come inexcusable waste. We have squandered 
a great part of what we might have used, and have not stopped to 
conserve the exceeding bounty of nature, without which our genius 
for enterprise would have been worthless and impotent, scorning 
to be careful as well as admirably efficient. 

We have been proud of our industrial achievements, but we have 
not hitherto stopped thoughtfully enough to count the human cost, 
the cost of lives sniffed out, of energies overtaxed and broken, the 
fearful physical and spiritual cost to the men and women and chil- 
dren upon whom the dead weight and burden of it all has fallen 
piteously the years through. 

The groans and agony of it all had not yet reached our ears, the 
solemn, moving undertone of our life, coming up out of the mines 
and factories and out of every home where the struggle had its inti- 
mate and familiar seat. With the great government went many 
deep secret things which we too long delayed to look into and scru- 
tinize with candid, fearless eyes. 

The great government we loved has too often been made use 
of for private and selfish purposes ; and those who used it had for- 
gotten the people. 

At last a vision has been vouchsafed us of our life as a whole. 
We see the bad with the good, the debased and decadent with the 
sound and vital. With this vision we approach new affairs. Our 
duty is to cleanse, to restore, to correct the evil without impairing the 
good, to purify and hiunanize every process of our common life 
without weakening or sentimentalizing it. 

There has been something crude and heartless and unfeeling in 
our haste tO' succeed and be great. Our thought has been, "Let 
every man look out for himself, let every generation look out for 
itself," while we reared giant machinery which made it impossible 
that any but those who stood at the levers of control should have a 
chance tO' look out for themselves. 

We had not forgotten our morals. We remembered well enough 
that we had set up a policy which was meant to serve the humblest 
as well as the most powerful, with an eye single to the standards of 
justice and fair play, and remembered it with pride. But we were 
very heedless and in a hurry to be great. 



SOCIAL CONTROL OF INDUSTRY 137 

We have now come to the soher second thought. The scales of 
heedlessness have fallen from our eyes. We have made up our 
minds to square every process of our national life again with the 
standards we so proudly set up at the beginning and have always 
carried at our hearts. Our work is a work of restoration. 

We have itemized with some degree of particularity the things 
that ought to be altered, and 'here are some of the chief items : 

A tariff which cuts us off from our proper part in the commerce 
of the world, violates the just principles of taxation, and makes the 
government a facile instrument in the hands of private interests ; 

A banking and currency system based upon the necessity of the 
government to sell its bonds fifty years ago, and perfectly adapted to 
concentrating cash and restricting credits ; 

And industrial system which, take it on all its sides, financial as 
well as administrative, holds capital in leading strings, restricts the 
liberties, and limits the opportunities of labor, and exploits without 
renewing or conserving the natural resources o^f the country. 

A body of agricultural activities never yet given the efficiency of 
great business undertakings or served as it should be through the 
instrumentality of science taken directly to the farm or afforded the 
facilities of credit best suited to its practical needs. 

Watercourses undeveloped, waste places unreclaimed, forests un- 
tended, fast disappearing, without plan or prospect of renewal, un- 
regarded waste heaps at every mine. 

We have studied as perhaps no other nation has the most effec- 
tive means of production, but we have not studied cost or economy 
as we should either as organizers of industry, as statesmen, or as 
individuals. 

Nor have we studied and perfected the means by which govern- 
ment may be put at the service of humanity, in safeguarding the 
health of the nation, the health of its men and its women and its 
children, as well as their rights in the struggle for existence. This 
is no sentimental duty. The firm basis of government is justice, not 
pity. These are matters of justice. 

There can be noi equality of opportunity, the first essential of 
justice in the body politic, if men and women and children be not 
shielded in their lives, their very vitality, from the consequences of 
great industrial and social processes which they cannot alter, con- 
trol, or singly cope with. 

Society must see to^ it that it does not itself crush or weaken or 
damage its own constituent parts. The first duty of law is to keep 
sound the society it serves. 

Sanitary laws, pure food laws and laws determining conditions 



f 38 READIXGS IX ECONOMIC PROBLEMS 

of labor which individuals are poAverless to detemiine for them- 
selves are intimate parts of the very business of justice and legal 
efficiency. 

These are some of the things we ought to do, and not leave the 
others undone, — the old-fashioned, never-to-be-neglected, funda- 
mental safeguarding of property and of individual right. 

We shall deal with our economic system as it is and as it may be 
modified, not as it might be if we had a clean sheet of paper to 
w^ite upon ; and step by step we shall make it what it should be, 
in the spirit of those who question their own wisdom and seek coun- 
sel and knowledge, not shallow self-satisfaction or the excitement 
of excursions whither they cannot tell. Justice, and only justice, 
shall always be our motto. And yet it will be no cool process of 
mere science. The nation has been deeply stirred, stirred by a sol- 
emn passion, stirred by the knowledge of wrong, of ideals lost, of 
eovernment too often debauched and made an instrument of evil. 



G. CONSER\\VTR~E FACTORS IX CURRENT SOCIAL 
DEVELOPMENT. 

80. A Defense of an Industrial Aristocracy. 

EY W. H. MALLOCK. 

The whole secret of social progress is the domination of the 
greatest. Progress and the maintenance of civilization in any com- 
munity depends upon its possessing a number of great men, of which 
number the greatest shall, by competition with the others, succeed 
in gaining a control over the beliefs and actions of the majority. 

The social activities upon which progress depends are reducible 
to five kinds — intellectual, religious, military, economic, and politi- 
cal. The first three of these are such that the means by which the 
great m.an makes his intluence felt hardly requires discussion. The 
only domains that require minute and careful discussion, and have 
really a direct bearing on the practical problems of the day, are the 
domain of economic production and the domain of political govern- 
ment. These may be said to contain between them the whole of the 
questions with regard to which parties are divided. 

This is especially true of the domain of economic production : 
for it is mainly on account of its connection with the production and 
distribution of wealth that political government excites so much pop- 
ular interest. And in every other domain of human activity equally 
we shall find that the interests of men have an economic process at 



SOCIAL CONTROL OF INDUSTRY 



139 



their basis, or economic progress as their object. The processes of 
production and commerce are the central processes of every nation's 
life. It is to foster them that governments exist. It is in the domain 
of economics that all the social problems of the day begin or end. 
Consequently the question which is really our first concern relates to 
the means by which great men, whose greatness consists in excep- 
tional powers in causing the production of wealth, and on whom 
consequently the wealth of the whole community depends, obtain a 
control over other men's productive actions. 

This control can be secured in two ways only. One of these 
wa3-s is slaver}- ; the other is the capitalistic wage-system. They 
resemble each other because they are both contrivances by which 
the superior few may secure the implicit obedience of the many. 
Slavery- and the capitalistic wage-system differ onty in this : that the 
one secures the required industrial obedience by operating on men's 
fears ; the other on their desires and wills. It is because of this 
method of securing obedience that what is called capitalism is an 
agent of progress, and has developed itself in progressive communi- 
ties. The wage-system represents capital, in the form of immediate 
means of subsistence, as owned or controlled by a small number of 
persons ; and its efficiency as a productive agent resides in the bar- 
gain which it enables any great man possessing it to make with or- 
dinary workers, a barg"ain that they shall do their work in accord- 
ance with the great man's directions. The essence of the wage- 
system is in the power it gives to the few to direct the producers. 

But what are the means by which the most elffcient of the great 
men get this control into their own hands, and take it out of the 
hands of the less efficient? Under the regime of private capitalism 
this process is simple. The fitness or efficiency of each great man is 
according to the acceptability to the public of the goods or ser\-ices 
which" he offers them. If the public are not pleased with these goods 
and services, they do not buy or demand them; and the capital of 
the man by whom they are offered, not being rewarded by any 
money received, melts in his hands, and with it his control over other 
men's labor. Meanwhile, by a converse process, the great man who 
offers goods or ser\'ices which the public desire and find serviceable, 
renews and increases from the payments for these goods the capital 
which has been disbursed by him, and renews and increases his con- 
trol over other men's labor. 

The w^ge-system is the sole alternative to slaver}- as a means by 
which one great man shall compete against another great man. Com- 
petition here is not a struggle for existence but a struggle for dom- 
inance. Under capitalism it is a struggle between employers to find 



I40 READINGS IN ECONOMIC PROBLEMS 

laborers, not a struggle among the laborers tO' find employment. In 
the maintenance of this competitive struggle the workers are pro- 
foundly interested; for, not only does it inflict no injury upon them- 
selves, but to it that progress in the processes of production is due 
on which their own hopes depend. 

So grounded is capitalism in human nature that we might reduce 
society to ashes, but the present system and capitalistic competition 
would rise again out of them. For the outer form of capitalism is 
not what capitalism is, any more than a painter's brush is the power 
that paints great pictures. Capitalism, in its essence, is merely the 
realized process of the more effi.cient members of the human race 
controlling and guiding the less efficient ; capitalistic competition 
is the means by which, out of these more efficient members, society 
itself selects those who serve it best ; and no society which intends 
to remain civilized, and is not prepared to return to the direct coer- 
cion of slavery, can escape from competition and the wage-system 
under some form or other. 

Inequality in productive power is of such a kind as to render the 
industrial obedience of the larger number oif men to a small minority 
the primary and permanent condition on which economic progress 
is possible; that which feather-brained fanatics call "economic free- 
dom" would be merely another name for economic helplessness. 
All the democratic formulas which for the last hundred years have 
represented the employed as the producers of wealth, and the capi- 
talistic employers as the appropriators of it, are, instead of being 
expressions O'f a profound truth, only inversions of it. It is the few 
and not the miany who, in the domain of economic production, are 
essentially and permanently the chief repositories of power. 

8i. Judicial Decisions and Social Reform. 

BY FRANK J. GOODNOW. 

It is a difficult matter to derive any general principles from the 
decisions of the courts as to the constitutionality of governmental 
regulations, since so much depends upon the reasonableness of the 
regulation at issue. It may, however, be said that where there is any 
connection between social legislation and public health or safety, the 
courts exhibit considerable unwillingness to declare the legislation 
unconstitutional; but where the connection is not clearly evident, 
or where the purpose is not so much to protect the public health and 
safety as to better the economic condition of the laboring classes 
and to place them in a stronger position in their struggle with their 
employers, the tendency of the judicial mind is to consider such 



SOCIAL CONTROL OP INDUSTRY 141 

legislation as either class legislation or as infringing upon the rights 
of property or liberty which are conceived in terms of laissez-faire. 
The courts do seem in some, though not in all instances willing to 
apply to modern conditions theories developed in the English law 
before the acceptance of the ideas of laissez-faire — ^theories through 
whose application vast powers of regulation over property affected 
with a public interest, and over attempts at monopoly and in restraint 
of trade, are recognized as still possessed by the government. 

It may therefore be hoped, if not expected, that as they come 
to have a clearer idea of the difference between present and former 
economic conditions, the courts may, as in the case of property af- 
fected with a public interest and of monopolies, come to the con- 
clusion that the state may constitutionally be used to protect the 
weaker classes in the community from the dangers not merely of 
disease and unsafe conditions of labor, but as well from those which 
are attendant upon great economic dependence in an increasingly 
industrial society. It may be pointed out that in reaching such a 
conclusion they would not he greatly departing from the old Eng- 
lish law which offers examples, as in the case of the usury laws, of 
a desire to protect those members of society who were at economic 
disadvantage in the struggle for existence. 

An important consideration in this connection is the question 
of the theory that underlies current legal conceptions. This is per- 
haps nowhere miore clearly brought out than in the recent Missouri 
case of State vs. Switzler* where the court says, "Paternalism, 
whether state or federal, as the derivation of the term implies, is an 
assumption by the government of a quasi-fatherly relation to the 
citizen and his family, involving excessive governmental regulation 
of the private affairs and business methods and interests of the peo- 
ple, upon the theory that the people are incapable of managing their 
own affairs, and is. pernicious in its tendencies. In a word, it min- 
imizes the citizen and maximizes the state. Our governments are 
founded upon a principle wholly antagonistic to this. Our fathers 
believed the people capable of self-government. Such a govern- 
ment is founded upon a willingness and desire of the people to take 
care of their own affairs and an indisposition to look to the govern- 
ment for everything. The citizen is the unit. Under self-govern- 
ment we have advanced in all the elements of a greater people more 
rapidly than any nation that has ever existed upon the earth, and 
there is greater need now than ever before in our history for ad- 
hering to it." 

"^ 143 Mo. 287. 



142 READINGS IN ECONOMIC PROBLEMS 

It is to be noted that the historical argument, which is in a large 
degree the controlling argiiment in this case, when taken together 
with the insistence upon that political and economic theory known 
as laissez-faire, to which is accorded an absolute and universal ap- 
plication at all times and under all circumstances, both makes social 
reform impossible, so far as concrete measures cannot be justified 
by our own histo'ry, and regards political and economic conditions 
as static rather than progressive in character. The result of its uni- 
versal application will be tO' fix upon the country for all time insti- 
tutions which, as has been pointed out, were established in the eigh- 
teenth century to deal with conditions then existing, but which may 
in this the twentieth century be unsuitable because of the economic, 
social, and political changes which have taken place in the last one 
hundred years. 

82. The Dominance of the Entrepreneur View-Point in Politics. 

BY WAI,TON H. HAMII^TON. 

It requires no great familiarity with the political and economic 
history of England and the United States in the last hundred years 
to reveal the dominance of industrial interests in shaping legisla- 
tion. The men who have ruled the commercial world and created 
the industrial systems of these two countries have ostensibly been 
advocates of the policy of non-interference with industry. But in 
practice they have drawn the line only at legislation' which adverse- 
ly afifects business. They have never lost an opportunity to miake 
a most active use of the machinery of government in furthering 
their own interests. A casual study of the legislation passed in this 
country during the decade ending in 1907 will show how potent has 
been the influence of this class. In general the legislation is in 
keeping with the interests of the producing classes; in particular it 
seems tO' have been shaped largely from the entrepreneur view-point. 
So dominant has the latter been as almost tO' preclude a considera- 
tion of legislation tending to general social betterment. Perhaps un- 
consciously, rather than consciously, has a view-point which con- 
siders primarily the interests of only a small part of the people writ- 
ten itself into our political activity. But, even then, in a democracy, 
such as the United States, how has the view-point of a class become 
so powerful as to shape general legislation? 

The answer to the question must find a beginning in the technical 
changes which characterized the Industrial Revolution. The most 
significant of these was the replacement O'f the tool by the machine. 
A tool is a simple instrument, costing very little, useful for a number 



SOCIAL CONTROL OF INDUSTRY 



143 



of different tasks, and depending for its success upon the skill of 
the laborer using it. A machine, on the contrary, is a complex of 
many parts, costing much in labor and accumulated wealth, useful 
for a highly specialized task, and depending for its success upon the 
nicety of its own mechanism. Where tools were universally used, 
the time of the productive process was short, productive establish- 
ments were many, and the laborer was quite independent. The cost 
of the machine, and the very small contribution which a single unit 
of product can contribute tO' it, prevent the machine from being 
used except in the production of a large number of units. But the 
specialization of the machine requires the use of a large number of 
machines in the production of a single article. Under machine pro- 
duction the economiical industr) is likely to be the one which differ- 
entiates the productive process intO' the largest number of separate 
acts for each of which a machine is used. The modern industrial 
unit is likely to be large, making use of much capital, and employing 
many laborers. Because of the peculiar adaptability of the machine 
to their needs, manufacturing, mining, transportation and industrial 
establishments have increased to great size, and have come to occupy 
a position of the highest impoirtance. 

This vantage position becomes of all the more importance when 
we realize the purpose for which the business is being conducted and 
its relations to other industrial units. In form it is a corporation. 
There exists no necessary personal relation between the manage- 
ment of the corporation and the stockholders. This means that the 
investors are demanding dividends ; that the management must pro- 
duce dividends. It is, therefore, natural that the • relationship be- 
tween the corporation's activities and social good is not kept in mind 
by those interested in the corporation's success. In the complex ar- 
rangement of modern business a social means has become an indi- 
vidual end. 

Relative to other businesses it occupies a strategic position. The 
productive process is a long one with many steps between the pro- 
duction of raw materials and the sale of the finished product. Only 
a few operations are performed by industrial concerns which make 
an extensive use of machinery. But the smaller concerns must se- 
cure regular dividends, and are, therefore, dependent upon the favor 
of the large concern. Unconsciously they come to have the attitude 
of the mien directing larger businesses. The complexity of modern 
industry has also resulted in creating a number of subsidiary agents 
who perfo'rmi general services which are necessities of the produc- 
tive process. Chief among these are the agencies of credit and in- 
vestment, banks, stock and produce exchanges, insurance companies, 



144 READINGS IN ECONOMIC PROBLEMS 

loan and mortgage associations. Since generally these institutions 
make their large profits from the operations oi the entrepreneur 
class, and in many cases are creatures of mining, manufacturing, 
and transportation interests, those who control them naturally think 
in terms of entrepreneur interests. Among other subsidiary inter- 
ests are those of the legal, advertising, and newspaper professions. 
Constant association with the entrepreneur class, identity of pecuni- 
ar}'^ interests, and an unconscious imbibing of managerial habits of 
thought make the views oi the legal class closely akin to those of the 
industrial magnates. The growth oi business has caused the news- 
paper to undergo a peculiar development. In its early history it was 
primarily a news-sheet, and was dependent for its success upon the 
faithfulness of its representation of the interests of the subscribers. 
Advertising was an incidental feature. Now the element of im- 
personality is distinctly marked in the news-vending business. The 
newspaper is owned by a corporation, the stockholders demand that 
dividends be forthcoming, and the management has no^ alternative. 
For that reason the advertisement as a source of revenue has ap- 
pealed more and more tO' the business office. Now it is safe to say 
that a large subscription list is incidental to charging high rates for 
advertising. So it has come about that, consciously or unconsciously, 
the business office exercises considerable influence over the editorial 
and news policy oi the paper. This has resulted in making a large 
part of the press a ready vehicle for the dissemination of informa- 
tion and opinions favorable to "big business." 

The position in which the laborer is placed forces him to- think 
largely in acquisitive terms. He sees in organization and in political 
activity a means for individual betterment. But wages for his labor 
he must receive regularly. In many cases the time-period in terms 
of which his thought processes run is no longer than a month, in 
many cases it extends only till Saturday night. So far as his own 
labor is concerned, especially if he is skilled, the laborer is relatively 
immobile. It is too much to expect him to vote in favor of a radical 
change in the industrial organization. His immediate interests are 
so inseparably bound up with those of his employer that to a large 
extent the latter's political views are his. 

Through a very elaborate differentiation of functions and an 
equally elaborate integration of parts, modern industrialism presents 
the appearance of a vast, intricate, and extremiely delicate machine. 
Its financial operations are carried on through the instrumentality 
of credit. So long as confidence holds out, the system moves along 
smoothly. But so soon as men lose confidence a train of activities is 
set in motion which mav result in the destruction at least tempor- 



SOCIAL CONTROL OF INDUSTRY 145 

arily, of the acquisitive powers of many classes. The very deHcacy 
of this mechanism creates a fear of disturbing the present arrange- 
ments. The business man feels that his interests are bound up with 
those of the large industrial and financial concerns, and for that 
reason he opposes innovation. The necessity for winning imme- 
diate profits deters him from favoring radical schemes. 

The stratification of society rests ultimately upon a pecuniary 
basis. The higher classes enjoy a prestige that causes the lower 
classes to imitate them in dress, in code of morals, in habit of 
thought, in political opinion. The position of men in the entrepre- 
neur class is very high. Their opinions upon all questions, particu- 
larly political questions, in which they have a peculiar interest, are 
likely to filter down through the various social strata which make 
up the state, and become a part of common-sense political philos- 
ophy. In the political system the legislator can better keep himself 
in office by favoring the local interests of his district than by work- 
ing for legislation for the general good. To the continuance of his 
political life the business man who occupies a strategic position in- 
dustrially, and who can make a substantial campaign contribution 
can contribute much. 

Other social currents, more subtle and harder to detect, also 
contribute to^ the dominance of the entrepreneur viewpoint. Ma- 
chinery has awed the human mind with a sense of its power and its 
strength. As a result to the modern mind the idea of size is almost 
identical with the idea of importance. To the superficial mind the 
large industrial establishment which employs many men is thought 
of as the cause of its laborers being employed. It appears that the 
factory or mill is an institution of Providence from which flows the 
blessings which the laborers' families realize through an expendi- 
ture of the wages paid out by it. We know that the coming of the 
machine multiplied individual productive powers, increased the size 
of economic incomes, and raised the general standard of living. 
Without going to the trouble of making nice distinctions one instinc- 
tively associates machine industr}^ with progress and regards in- 
dustries in which machinery is extensively used as really important, 
and looks upon those in which it is not so extensively used as old- 
fashioned, and of little social value. 

Machiner}^ too, favors the concentration of population, while 
non-mechanical industries favor its dispersion. This concentration 
brings into play all the sentimental forces which play about place, 
locality, and the city greatly to the advantage of local landowners. 
The manufacturing interests which make the city possible thus come 
to be regarded as necessary means to the realization of civic ends. 



146 READINGS IN ECONOMIC PROBLEMS 

The imiportance of these industries has in public thought been still 
further increased by what may be called the impersonality of cap- 
ital. The investment of capital tends to separate itself from the 
personal business inclinations of its owner. To the extent that 
industry depends upon capital for success, the state or municipality 
can not secure the industry simply by an appeal to the personal 
tastes and local prejudices of the owner. Special privileges have to 
be offered. Thus the competition of local units results in a state of 
public opinion favorable to the interests of industries carried on on 
a large scale. 

Of course other forces are at work in moulding political opinion. 
Many other attitudes are mixing themselves into the complex nexus 
of the attitude of the public towards industry. Into these currents 
of opinion it is not our purpose to go. It may be that they will be 
crushed before the powerful blow of entrepreneur views. Or it 
may be that they will blend themselves with that viewpoint, modify 
it, and render it less acquisitive and more considerate of social in- 
terests. Onlv time can tell. 



H. GOVERNMENTAL MEANS OF SOCIAL REFORM. 
83. Taxation as a Means of Social Control. 

BY ADOLPH WAGNEK. 

The modern science of economics not only recognizes the mutual 
dependence of public and private economic activity, and their mutu- 
ally complementary character; it also renounces the optimistic view 
of the present organization oif private industry, and recognizes the 
great evils in the system O'f free competition. It has come to know 
that the organization of productive industry by private initiative, 
and the distribution of wealth which takes place upon this basis 
have a decisive social influence. It knows that through this process 
the power and relations both o^f individuals and oi classes 
are determined in modern economic society. At the same time our 
science recognizes the influence which the state exercises directly 
and indirectly upon the distribution of wealth and position of social 
classes, by the fo^rm which its activity takes, by the manner in 
which it spends its revenues, by the kinds of taxation it adopts, and 
by the creation of public debts. 

From the knowledge of our science have developed two demands. 
In the first place, the state should so order its expenditures, tax 
system, and loans as to- remove certain economic and social evils 



SOCIAL CONTROL OF INDUSTRY 



147 



which have attended them in the past. And in the second place,, 
the state, by adoptingf appropriate policies, should remedy evils 
which are not due to its previous action in financial and other mat- 
ters. From this second demand it follows that, in the domain of 
public finance, expenditures should increase in order to enable 
the state to assume new functions ; and that taxation should be em^ 
ployed for the purpose of bringing about a different distribution 
of wealth from' that which would result from the action of free 
competition upon the basis of the present social order. It is the 
modern social problem which is here beginning to work this trans- 
formation in the science of finance. 

One who considers the present system unconditionally just, as 
the liberal school did, must logically consider the existing" distribu- 
tion of wealth, which results from this order, as the only righteous 
and just distribution. This conclusion the keener thinkers of the 
school have formulated. For a person of this school the existing 
distribution of wealth is a fact admitting of no further discussion. 
It follows then that taxation should nbt alter the existing distribu- 
tion. In this view of the case, therefore, taxation should be cor,- 
fined to the purpose of raising sufficient revenue ; and the socio- 
political theoiry of taxation s!hould be rejected. 

But, if one disputes the premises underlying the teachings of 
the liberal school, he can insist that the conclusion that the dis- 
tribution established by competition is not to be disturbed by tax- 
ation is not universally true. We need beside the purely fiscal theory 
of taxation, to establish a second, — the socio-political, by which a 
tax becomes something more than a means of raising revenue, and is 
considered a means of correcting that distribution of wealth which 
results from competition. 



IV. 
THE TARIFF PROBLEM. 

A. THE FACTORS IN THE PROBLEM. 
84. The Basis of International Trade. 

BY AI.VIN S. JOHNSON. 

All permanent exchange originates in differences in character 
of productive powers. This may have originated in differences in 
natural aptitude, or in differences in training. 

From a purely economic point of view trade is either local or 
interregional, not domestic or international. Differences in natural 
endowment, in general character of population, in rates of wages 
and interest, characterize interregional trade. As a rule, however, 
international trade is interregional, and is subject to the same 
rules. 

In some cases the products of the two regions are quite dis- 
similar. Neither region can produce the commodities which it 
receives from the other. A modern example is the exchange of 
iron and steel for teas and spices. Trade having this basis is 
naturally permanent ; with every reduction in costs of transporta- 
tion it tends to increase. But, most commonly, one of the trading 
regions or both can produce both classes of commodities exchanged. 
Usually one country has the advantage in producing one product 
and the other country in producing the other. It is therefore natural 
that an exchange of products between the two countries should take 
place. 

Differences in the essential character of the populations of two 
trading regions are difficult to define, since the characters of nations 
are always thickly overlaid with custom and habit. Nevertheless 
such differences exist. Trade based upon such essential differences 
also tends to increase in importance with improvements in transpor- 
tation. 

Trade based upon differences in relative supply of land at- 
tained extraordinary proportions during the nineteenth centur}'-. 
The Old World was densely, the New World, sparsely, peopled. 
It is well. known that the largest output per workman is attained 
through superficial cultivation. In manufactures on the other hand, 
density of population, instead of reducing productive efficiency, 
tends to increase it. Hence an exchange of agricultural products 



THE TARIFF PROBLEM 149 

for manufactures between the New World and the Old was natural 
and inevitable. While trade upon this basis tends to^ increase with 
reduction in costs of transportation, there is a counter tendency at 
work which in time checks it. Immigration flows intoi the regions 
rich in land. In the end such regions lose their peculiar advantages 
in the production of raw materials, and gain in power to produce 
manufactured goods cheaply. Trade of the character under dis- 
cussion may continue for centuries, but ultimiately it decays. 

If a nation has an abundant supply of capital which it is un- 
willing to invest in foreign lands, there are many branches of manu- 
facture that can be prosecuted with far greater advantage than 
in other countries ; since in practically every branch of manufacture 
the interest on capital makes up a large proportion of the total ex- 
penses. Such a nation, with a low interest rate, has a decided ad- 
vantage over a nation in which the supply of qapital is relatively 
scarce, while the latter has an advantag'e in those industries in 
which less capital is used. Under present-day conditions no country- 
can long hold a branch of trade merely through cheapness of capital. 
Like labor, capital tends to migrate tO' the less developed regions 
of the world ; its migration involves far less personal sacrifice and 
far less personal cost. Furthermore, capital increases rapidly in 
newer lands. Trade based upon differences in capital supply may, 
therefore, be regarded transitory. 

In a region long devoted to a given branch of industry, something 
that we may call a tradition of workmanship evolves. The best type 
of iron worker is not developed in a single day. Costly experiments 
in settling urban stock upon farms have demonstrated that it takes 
generations to make a farmer. Still more important is the tradition 
of workmanship in industries requiring a high degree of taste and 
skill. W^here is the Occidental whoi can produce an Oriental rug? 
When times are ripe, the population of a region may develop the 
tradition of workmanship necessary for the prosecution of any 
special branch of industry, but no region can be expected to gain a 
superiority in all lines. Trade, based upon such dift"erences, may, 
therefore, be treated as permanent in character. 

85. The Nature and Classification of Import Duties. 

BY GEORGE M_ ElSK. 

Customs duties were originally taxes on trade. They were pay- 
ments for the use of roads, bridges, ferries, ware-houses, weights, 
measures, or the protection of merchants and goods on the high- 
ways. According to Adam Smith they were "called customs as 



I50 READINGS IN ECONOMIC PROBLEMS 

denoting customary payments which had been in use from time 
immemorial." They were collected either at the boundary of the 
country, or at the gates of a town. Fiscal requirements were almost 
always the sole reason for the levying of these duties. In course of 
time there developed a two-fold system of taxation, internal duties, 
and customs duties. Customs duties in a national sense were first 
developed in England, .beginning especially at the time of Cromwell. 

There are three general classes oi customs duties : import duties, 
export duties, and transit duties. The latter are levied upon mer- 
chandise passing through one country and destined for another. 
CustomiS duties may be based upon value and measured in per- 
centages or upon a unit of weight or measure and measured in 
payments per pound, ton, etc. The former are called ad valorem 
and the latter specific duties. We speak of a systematic arrangement 
of customs duties as a customs tariff, or simply a tariff. 

Customs duties may either be for the purpose of revenue or for 
protection. In practice the terms are not used in an absolute sense, 
since both revenue and protection play more or less of a role in 
nearly all customs duties. There are two general classes of pro- 
tective duties, agricultural and industrial or manufacturing. German 
protection, for example, is more essentially agricultural, while pro- 
tection in the United States is principally manufacturing. Yet 
modern international conipetition has developed a community of 
interests between certain branches of agriculture and industry so 
that in most countries we find certain agrarian and industrial iur- 
terests united in favor of protection. 

The class oi commodities subject to import duties varies not 
only according to the purpose for which they are levied, but also in 
accordance with the divergent social, political and economic con- 
ditions of the country. Import duties are the most important class 
of customs duties, being employed almost universally by modern 
states. Growing national expenditures emphasize their import- 
ance. But international competition tends to discourage the levy- 
ing of import duties upon the raw materials used in manufacture 
or on food products. 

86. A Definition of Free-Trade. 

BY W. G. SUMMER. 

The term "Free Trade," although much discussed, is seldom 
rightly defined. It does not mean the abolition of custom houses, 
nor does it mean the sulbstitution of direct for indirect taxation, as 
a few American disciples of the school have supposed. It means 



THE TARIFF PROBLEM 151 

such an adjustment of taxes on imports as will cause no diversion 
of capital from any channel into zvhich it luould otherwise flow, into 
any channel opened or favored by the legislation which enacts the 
customs. A country may collect its entire revenue by duties on im- 
ports and yet be an entirely free trade country, so long as it does 
not lay those duties in such a way as to lead anyone to undertake 
any em\pioyment, or make any investment he zvoidd avoid in the 
absence of such duties; thus the custom duties levied by England, 
with a very few exceptions, are not inconsistent with her profes- 
sion of being a country which believes in free trade. They either 
are duties on articles not produced in Egland, or they are exactly 
equivalent to the excise duties levied on the same articles if made 
at home. They do not lead anyone to put his money into the home 
production of an article because they do not discriminate in favor 
of the home producer. 

87. A Definition of Protection. 

BY GEORGE E. HOAR. 

Protection, as used in our political and economic discussions, is 
the imposing of such duties on the importation of foreign products 
as will prevent a domestic producer of an article from having 
his business destroyed by the competition of the foreign import, 
zuhile he establishes it ; or will enable him to maintain the production, 
without its being destroyed or rendered unprofitable by the com- 
petition of the foreign article after it is established, when he cotild 
not otherwise sO' establish or maintain it ; or the enabling him to 
pay larger wages in such production than he could pay if he were 
subject to the foreign competition. 



B. TARIFF HISTORY. 
88. A Short Sketch of American Tariff History. 

BY HARRISON S. SMALEEY. 

For the first quarter of a century after the establishment of our 
national government the idea of protection played an almost neg- 
ligible part in American fiscal policy. The first tariff law, that of 
1789, was little else than a revenue measure. The duties on a very 
few articles were made higher than the average with the idea that 
their production at home needed encouragement; yet the rates 
were actually so low that little, if any, stimulus resulted. The general 



152 



READINGS IN ECONOMIC PROBLEMS 



sentiment Oif the country was in favor of free trade. In the south 
the absence of manufacturing and the prevalence of agricuhure 
based on slave labor created indifference and, later, hostility to pro- 
tectionist arguments ; while in New England the great interest of 
the people in shipbuilding and the carrying trade attached them to 
the policy of freedom in commerce. Moreover the sensitiveness 
oi the American people with reference to taxation rendered the sug- 
gestion Oif a national protective system less agreeable tO' the public. 

Not restrictive legislation, but the Napoleonic wars, first gave 
an artificial stimulus to American manufactures. Napoleon's Berlin 
and Milan decrees, and the English orders in Council resulted in 
the passage of the Embargo Act in December, 1807, and for more 
than a year thereafter American harbors were closed to foreign 
commerce. When at last the war with England began, foreign 
commerce was almost totally prostrated. 

The result of this interference was that the American people 
were in large measure thrown on their own resources and co'mpelled 
to manufacture many things which they had formerly imported. 
During the years 1808-15 so many manufacturing establishments 
had been started that, by the time the war was over, a sentiment 
was growing up in favor of protection. Accordingly in 1816, when 
a bill was passed raising duties to a general average of about 20 per 
cent for revenue purposes, the rate on textile fabrics was made 25 
per cent for protective purposes. 

Troublous times followed. Business was in an unsettled con- 
dition, especially because of the influx of foreign goods which began 
after the war closed. Added to this were very serious currency 
troubles. Afifairs reached a climax in the crisis of 1818-19; and al- 
though, after that, prosperity was restored, there remained a lively 
public opinion in many quarters in favor of protection. In 1818 
some slight extension of the policy was made, and in 1820 a fairly 
comprehensive high protective tariff bill was passed by the House 
and defeated in the Senate by only one vote. In 1824 a rather high 
protective tariff law was passed. Within the next few years the 
tariff was dragged into politics. A new political aHgnment was tak- 
ing place and the opposing leaders, headed by Adams and Jackson, 
were manouvering for position. Hence befo're the parties settled 
down to definite policies a period of uncertainty prevailed. It 
was at this time that the law of 1828 was passed, establishing a 
tariff higher than that of 1824. So many features of this act proved 
unsatisfactory that it came to be called the "Tariff of Abominations." 
By 1832 the demand for revision had become so great that in that 
year a new act was passed removing most of the specially objection- 



THE TARIFF PROBLFM 



153 



able features. But this did not satisfy all of the opponents of the 
protective, policy. The interests of the north and the south in refer- 
ence to that policy had never been identical, but the line of cleavage 
became especially clear in the discussion oif the "econoinic mon- 
strosity" — as the law of 1828 has been called. The south objected 
strongly to protection, Randolph declaring that the tariff of 1828 
was calculated "to rob and plunder one-half of the Union for the 
benefit of the residue." At this time Calhoun's ideas as to state 
sovereignty and nullification were taking firm hold in some quarters, 
and as a result the people of South Carolina assembled in con- 
vention, "nullified" the tariff, and threatened secession if attempts 
were made to enforce it within the state. 

This crisis was met by the Compromise Tariff Act of 1833, which 
contemplated a gradual abandonment of protection and an ultimate 
return to a revenue tariff of duties in excess of 20 per cent. One- 
tenth of the excess was to- be removed in 1834, another tenth in 1836, 
another in 1838, and another in 1840; on January i, 1842, three- 
tenths were to come off, and the rest on July i, 1842, thus reducing 
all duties to a 20 per cent level. Hardly had the 20 per cent level 
been reached when the Whigs, who had . but recently come into 
power, passed the high protective tariff of 1842. There was no great 
public demand for this law. 

At the next presidential election a political reverse occurred and 
the Democrats, coming once more into power, passed, in 1846, a 
law v/hich has sometimes been called a free trade measure. It was 
in fact a moderate protective measure. While some duties were 
very high, the most important articles paid but 25 and 30 per cent. 
The law, which often bears the name of the Secretary of the Treas- 
ury, Walker, was in force until 1857, when a still lower level of 
duties was adopted. Most of the important articles were placed on 
a 24 per cent, basis. This reduction was adopted because the exist- 
ing law was bringing an excess of revenue into the treasury. 

The Morrill law of 1861 was passed, raising the level of duties 
above that of the tariff of 1846. This law was enacted partly be- 
cause of protectionist ideas and partly for political effect. Hardly 
had it been passed before the South seceded. Throughout the con- 
flict which followed modifications of the tariff were constantly being 
made, and in the end the level of duties was very greatly raised. 

The primary reason for the advances in tariff rates was the 
need of revenue, but the idea of protection was also prominent. The 
government, in its search for revenue, had adopted a most elaborate 
policy of internal taxation, including taxes on manufactured goods. 
It was claimed, therefore, that since American producers were 



154 READINGS IN nCONOMIC PROBLEMS 

burdened with heavy taxes, which increased the cost of production 
and so put them at a disadvantage as compared with foreigners, 
they should be protected by a proportionally higher tariff duty. 
Thus many "compensating duties" were added to the already high 
rates. The level thus reached was in some cases still further ele- 
vated through the efforts of those congressmen who found it easy 
to secure increases in duties under the pretense of augmenting the 
revenues. Under the stress of all these circumstances the average 
rate of duty on dutiable goods rose toi about 37 per cent in 1862 and 
to about 47 per cent in 1864. 

During the war no one imagined that the excessive duties would 
be permanent. As the years passed the war tariff, without sub- 
stantial-reduction, continued in force; and even in 191 1 we had a 
general level of duties practically the same as that which prevailed 
toward the close oi the Civil War. Soon after the termination of 
the war Congress began to repeal the special internal revenue taxes 
for which compensating duties had been established. It should 
then have taken away the compensating duties. But it did not 
do so ; and today the American people are still paying many special 
duties designed to compensate manufacturers for taxes which have 
not been levied upon them for forty 3^ears or more. 

Several reasons may be assigned for the failure of Congress 
to reduce the war tariff after the close of the conflict. Its attention 
was largely drawn to the problems of reconstruction in comparison 
with which the tariff was a minor issue. Again, Southern opinion, 
which alone was favorable to free trade, was not strong. Further- 
more, the tariff was in a state of great confusion, and its intelligent 
revision would have required a great deal of time and care. Still 
another factor of a political character was probably of considerable 
consequence. The Republican party had been organized as a. pro- 
test against the spread of slavery. With the successful termination 
of the Civil War its object was accomplished. Hence it was left 
without a special reason for its continued existence. If the party 
was to remain a force in politics it must have a positive platform 
on which to stand. So- the Republican leaders seized upon protec- 
tion and made it one oi their leading policies. But most important 
of all, the protected interests exerted in the congressional lobbies a 
powerful influence to- prevent a reduction of duties. Indeed, from 
that time to this the pressure brought by protected producers upon 
Congress and congressmen has been the most serious obstacle in 
the way of tariff reform. For these reasons the war tariff level was 
maintained. Within a few years the popular mind became accus- 
tomed to high protection and more or less adjusted to it, and the 



THE TARIFF PROBLEM 155 

lobbyists and representatives of protected interests found it relatively- 
easy to secure what they wanted from Congress. 

Yet numerous readjustments were made. Thus in 1870 the 
duties on certain revenue articles and a very few protected articles 
were lowered and, under cover of these reductions, increases were 
made in the rates on steel rails, nickel, flax and other goods. At 
other times the duties on wool, woolens^ copper and other articles 
were advanced. In 1872 the agents of the manufacturers felt it to 
be good policy to permit some reduction, because the existing duties 
were bringing in a surplus revenue and also because the farmers 
in the west, who were not in a flourishing condition, were restless 
under a tariff which raised the prices of most of the articles they 
purchased. The result was a horizontal reduction of 10 per cent 
in all rates. Coffee and tea were placed on the free list, — an act 
which showed the determination of the champions of protection to 
lower the duties on revenue, rather than on protected articles. In 
1875 the tariff was restored to its former level. 

In the early eighties the treasury was again overflowing and 
agitation for tariff revision was raised. A commission appointed 
to consider the question reported a scheme which contemplated a 
moderate reduction. The Senate passed a bill embodying ideas of 
the commission, but the House failing to concur the bill was sent to 
conference, and there many rates were raised. As a result there 
was but little reduction in the general level of duties. The bill as 
passed in 1883, was an effort to satisfy the popular demand for 
revision and at the same time save the principle of high protection 
by making innumerable and confusing readjustments. But despite 
this. President Cleveland, elected in 1884, came out strongly in 
favor of tariff reduction, and it became the leading issue in the 
campaign of 1888. The Republican leaders felt driven in defense 
of their party to accept the issue and to advocate more strongly 
than ever the policy of high protection. When, therefore, they 
succeeded in electing their candidate, Benjamin Harrison, they 
proceeded to adopt a new tariff which surpassed in altitude all 
previous achievements. This measure, the McKinley Act, resulted 
in a substantial increase in the general level of duties. The neces- 
sity of reducing the revenue was again met without any sacrifice of 
the protective principle. The duty on raw sugar, averaging 2 cents 
a pound, was removed, thus eliminating all revenue from imported 
sugar, but a bounty of 2 cents was granted to all sugar producers 
in this country, thereby protecting them and relieving the treasury 
surplus at the same time. 



156 READINGS IN ECONOMIC PROBLEMS 

Hardly had this act been passed when it became evident that 
it was not altogether popular. The Republican leaders had advanced 
and extended the policy of protection. This was more than the 
people were readv to agree to, and at the congressional election of 
1890 there was an overwhelming Democratic landslide. Again in 

1892, the Democrats were successful, capturing the Presidency and 
the Senate, as well as the House. They were then in a position to 
revise the tariff. 

Before taking up the tariff, however, they found it necessary 
to consider the currency question. The Repuiblican Congress in 
1890 had passed a bill for the limited coinage of silver. The result 
had been the virtual disappearance of gold and a fear that the 
country would go on a silver standard. This was the chief cause 
which was driving the country toward a crisis. Congress, sum- 
moned by the President, repealed the silver Purchase Act, but too 
late to avert the crisis. The repeal created bitterness and faction 
within the party, which made the prospect of harmonious action 
on the tariff exceedingly dim. The party situation was especially 
difficult because the margin in the Senate was small, there being 
but six more Democrats than Republicans. Under these circum- 
stances tariff revision became a difficult task and the Wilson Act. 
passed in 1894, was a most unsatisfactory measure. The House 
proposed substantial reductions, in most of which the Senate would 
not concur. The bill as passed, while a more moderate measure 
than the McKinley Act, was not on the whole so low as the tariff 
of 1883. President Cleveland was so displeased that he would not 
sign the bill, but allowed it to become a law without his signature. 
The Wilson Act was obviously not a sincere effort to carry out 
democratic principles. Moreover the duty on refined sugar was 
adjusted so as to give protection to the Sugar Trust, and as the 
Democrats has posed as the antagonists of monopolies, their sur- 
render to the sugar octopus hurt them seriously. The panic of 

1893, caused largely by the silver legislation of the Republicans, had 
left the country plunged in a most serious business depression. 
This began before the Wilson bill was introduced. No' tariff legis- 
lation of any kind could have relieved the situation perceptibly. 
Surely there was no threat to business interests in the modest reduc- 
tions of the Wilson Act. Yet in an unreasoning fashion people 
began to blame the Wilson tariff for the failure of business to re- 
cover from the panic. The development of interest in the silver 
question opened a possible way of sidetracking the tariff, and when 
in the Democratic convention of 1896 Bryan made his celebrated 



THE TARIFF PROBLEM 



157 



"cross of gold'' speech, he was hailed as the new leader of the party 
and the free coinage of silver was declared to be the paramount 
issue. 

Nevertheless the tariff was not by any means lost from view. 
The Republicans, victorious in the election of i8c)6, felt authorized to 
raise the tariff once more. In consequence they passed the Dingley 
law of 1897, which was a revision upward, restoring the general 
level of the McKinley Act. The duty on wool was restored to the 
rates of 1890. The dut}^ on raw sugar was also restored and the 
rates on refined sugar so adjusted as to give the sugar trust the 
samie advantages that had been given it by the much-criticised 
Wilson Act. 

In 1900, as to the tariff, the Republicans had an argument, which 
though unsound, was bound to carry- weight with the people. They 
could say : "From 1894 to 1897 yO'U had a democratic tariff and 
you had hard times; from 1897 to 1900, you have had a Republican 
tariff and prosperity has prevailed." It made no difference that the 
Democratic tariff was a high protective tariff" ! Nor did it make any 
difference that the hard times of 1893-1897 had been due to causes 
other than the Democratic tariff', while the boom times of 1897- 1900 
had been due almost wholly to causes other than the Republican 
tariff ! "Post hoc, propter hoc." Realizing this, the Democrats 
evaded the tariff, and found a paramount issue in Imperialism. The 
Republicans were again victorious and the Dingley tariff remained 
untouched. 

But before the campaign of IC104 the situation changed. Be- 
tween 1899 and 1002 a large number of enormous industrial con- 
solidations were effected under the "favorable" laws of New Jersey. 
These were regarded as "trusts." The old fear of monopolies was 
renewed and increased, and anti-trust sentiment was not slow in 
appearing. Now it has long been evident that in some cases mon- 
opolies had been able to charge extortionate prices because they were 
protected from foreign competition by unduly high tariff duties. 
The Republican leaders felt the pressure of the public conviction 
that excessive tariffs make possible exorbitant monopoly prices. 
Accordingly in their platform they stated that the duties should at 
least equal the difference in cost of production at home and abroad. 
On their part the Democrats regained their courage and denounced 
protection, especially condemning the existing law as one which 
permitted the trusts to oppress the people. But, although the 
Republicans held out noi definite hope of a revision of the tariff, 
they were able to win the election on the overshadowing issue of 
Roosevelt. 



158 READINGS IN ECONOMIC PROBLEMS 

Having won the election the Republicans settled down to- a policy 
of inaction with reference to the tariff. Before the campaign of 
1908,, however, popular sentimient, due both to trusts and to^ the 
high cost of living, had sO' developed that the Republican leaders 
admitted the necessity of promising a revision. Accordingly in 
the platform of 1908 they declared unequivocally that "the true 
principle oi protection is best maintained by the impO'sition oi such 
duties as will equal the difference between the cost of production 
at honiie and abroad, together with a reasonable profit to American 
industries." They also promised that, if successful in the election, 
they would at once revise the tariff. The Democrats, meeting soon 
after, declared that they welcomed "the belated promise of tariff 
reform now affected by the Republican party as a tardy recognition 
of the righteousness of the Democratic position" on the question ; 
but they added that the people could not safely trust revision to 
a party so deeply obligated to the highly protected interests as 
was the Republican party. The Republicans v/on. The result of a 
special session of Congress was the Payne-Aldrich law. Whatever 
change in the general level of duties has been made by the new law, 
the difference is not large enough to be of any importance one way 
or another. The rates in certain schedules were obviously increased, 
in others diminished, and in others left at substantially the same 
general level. 

A just estimate of the merits of the Payne-Aldrich law as a 
whole cannot be made now, but some statements can be made with 
confidence. It is a high protective tariff. The readjustment of 
duties in it was not such as to reduce the cost of living, or, with 
but one or two exceptions, to interfere with the monopoly powers 
of any trust. Many jokers and delusive provisions were included 
in the law. For example, sugar was reduced one-twentieth of a 
cent a pound. Congress alsO' "dealt a blow at the beef trust" by 
reducing the duty on fresh mieats one-half a cent a pound. The 
method of counting threads in cotton goods was so changed as 
almost tot double the duties on some classes of goods. Certain 
grades of sugar pay more because of a change in the method of 
testing sugar, and so on. In short the tariff' revision oi 1909 was 
quite as much a matter of politics as ever before. 



THE TARIFF PROBLEM 159 

C. ASPECTS OF THE FRAMING OF A TARIFF BILE. 

8g. Resolutions of the National Wool Growers Association and 
National Association of Wool Manufacturers. 

Resolved, That the mutuality of the interests of the wool pro- 
ducers and wool manufacturers of the United States is established 
by the closest of commercial bonds, that of demand and supply; 
it having been demonstrated that the American grower supplies 
more than 70 per cent of all the wool consumed by American mills, 
and, with equal encouragement, would soon supply all which is prop- 
erly adapted tO' production here ; and further, it is confirmed by the 
experience of half a century that the periods of prosperity and 
depression in the two branches of the woolen industry have been 
identical in time and induced by the same general causes. 

Resolved, That as the two branches of agricultural and manu- 
facturing industry represented by the woolen interest involve largely 
the labor of the country, whose productiveness is the basis of 
national prosperity, sound policy requires such legislative action as 
shall place them on an equal footing, and give thenii equal encour- 
agement and protection in competing with the accumulated capital 
and low wages of other countries. 

Resolved, That the benefits of a truly national system, as applied 
to American industry, will be found in developing manufacturing 
and agricultural enterprise in all the States, thus furnishing markets 
at home for the products O'f both interests ; and 

Resolved, further. That is is the sense of this meeting that in 
the coming revision of the tariff the present duties both on wool 
and woolen goods be maintained without reduction. 

90. An Argument for High Duties upon Woolen Goods. 

BY N. T. FOI.WELI<. 

Unlike the iron and steel industry, where machinery manufac- 
ture cheapens the cost of production, the manufacturer of worsted 
and woolen textiles has no advantage over his European competitor 
in quantity produced ; man for man, loomi for loom, the production 
is the same. The climate of England, France and Germany is 
better adapted for spinning than ours, and they can spin finer yarn 
from the same grade of wool than we can here, and consequently 
can run their spinning frames at a higher rate of speed, thus getting 
greater production. The oft-repeated story that an American 
workman can produce more than his brother abroad is false as far 
as the worsted and woolen trade is concerned. 



i6o READINGS IN ECONOMIC PROBLEMS 

Our mills have been at a high cost of labor and materials and 
are partially filled with machinery that has paid a duty of from 30 
to 60 per cent. All the numerous articles which go tO' equip a mill 
have cost from 30 tO' 50 per cent more than the amount required 
abroad. 

Our wages are double what are paid in England and three times 
the amount paid in France and Germany. 

There is nO' reason why the rates of duty should be lowered 
on worsted and woolen textiles, as conditions which prevail today 
are no different from those which prevailed at the time the Dingley 
bill became a law, with one exception, namiely our wages have in- 
creased. 

We are importing from two to three million dollars per week, 
foreign cost, of dry goods, and this fact is conclusive proof that the 
tariff should be raised rather than lowered. 

91. How Duties are Sometimes Secured. 

BY WM. WHITMAN AND S. N. D. NORTH. 

Elsmere, April 4, 1897. 

Dear Mr. Whitman : Now about the tariff. I cannot, after what 
has been said to me in reference to- my confidential relations with 
the committee, keep you posted as I would like to do. . . Let 
me ask you a question. Should tops at a 24-cent line have the same 
compensatory duty as yarns at a 30-cent line? Should tops at a 24- 
cent line have a compensation duty of 27^/2 cents? . . I do not 
want you to intimate tO' any Senator that I have written you on 
this subject. I am kept at work from 10 A. M. until midnight and 
I have not sufficient clerical assistance as yet. I am the only person 
whom the committee allows at its meetings. 

Truly yours, 

S. N. D. North. 



Boston, June 2, 1897. 

My dear Mr. North: We all depend upon you to watch closely 
our interests, to see that nothing is overlooked or neglected by our 
friends on the committee. I have no doubt they will do all they 
can do, but with so many interests to look after, our special repre- 
sentative must see to it that our interests receive proper attention. 

Yours very truly, 

William Whitman. 



THE TARIFF PROBLBM i6i 

92. The Conflict of Interests. 

The following typical attitudes on various duties will give some 
idea of the local and industrial conflict of interests that had to be 
reconciled in the tariff bill of 1909. These instances are all taken 
from speeches reported in the Congressional Record. A Republican 
from New York considered a duty on hides inexcusable. A Repub- 
lican from Massachusetts appealed for free hides in the interests 
of the consumer. A Southern Democrat demanded a protective 
duty on rice. Free coal was pronounced by a Pennsylvania Con- 
gressman to be contrary to protective principles. Several congress- 
men, from different sections of the country, insisted that the glass 
industry should be highly protected. Senators from ihe Rocky 
Mountain States dwelt upon the importance of protecting the woolen 
industry. The representatives from California demanded protec- 
tive duties on lemons. A congressman insisted that a duty on post- 
cards would even things up with Germany. A Democratic Senator 
from Texas advocated very strenuously a duty on lumber. A Mich- 
igan Republican argued quite as strenuously for a high duty on 
sugar. A Minnesota Democrat urged adequate protection for 
barley. An Iowa congressman insisted that duties should be framed 
in such a manner as adequately and equally to protect all industries. 
An Oklahoma Democrat pleaded for a duty on hides. Senator 
Knute Nelson of Minnesota, a protectionist and a Republican, said :* 
"I am tired of being lectured to about these schedules and about 
the orthodoxy of the Republican party. Let us recognize the fact 
that with a tariff bill it is just as it is with the River and Harbor 
bills. There is nO' use disguising it. You tickle me and I tickle you. 
You give us what we, on the Pacific coast, want for our lead ore 
and our citrus fruit, and we will tickle yoit people of New England 
and give you what you want on your cotton goods. When you boil 
down the patriotism of the speeches just made you come toi the 
same basis as that of the River and Harbor bill. You vote for mv 
creeks, you vote for my harbors, you vote for my rivers, and I will 
vote for yours, and it will be all right." 

93. The Play of Special Interests. 

BY A. S. BOrXES. 

The history of tariff-making is not particularly honourable in 
all its details to any party or interest. It has too often partaken of 
a personal fight by manufacturers against the public and each other. 

* Congressional Record, May 10, 1909. 



i62. READINGS IN ECONOMIC PROBLEMS 

The strugg'le on this occasion (1883) before Congress lasted nearly 
the whole session. It was earnest and sometimes bitter; some in- 
terests were satisfied with the final result, others were not. The 
attempt to modify the tariff brought intoi bold relief the numerous 
conflicting interests and the difficulty and delicacy of the undertak- 
ing. As our industries become more heterogeneous, the tariff also 
grows more complex, and the difficulty of doing justice to^ all is in- 
creased. For example, the wool manufacturers, to succeed best, must 
have free w^ool and dye-stuffs ; on the other hand, both these inter- 
ests desired protection. The manufacturers of the higher forms of 
iron must have free materials to succeed best ; on the other hand, 
the ore producers, the pig-iron manufacturers, and every succeeding 
class desired a tariff on their products. It was not easy for these 
interests to agree, and som^e of them did not. The iron-ore pro- 
ducers desired a tariff of eighty-five cents a ton on ore ; the steel- 
rail makers were opposed to the granting of more than fifty ; the 
manufacturers of fence-wire were opposed to- an increase of duty 
on wire-rods used for making wire, and favoured a reduction ; 
the manufacturers of rods in this country were desirous of getting 
an increase; the manufacturers of floor oil-cloths desired a reduc-' 
ton or the abolition of the duty on the articles used by them; the 
soap manufacturers desired the putting of caustic soda on the free 
list, which the American manufacturers oi it opposed ; some of 
the woolen manufacturers were desirous that protection should 
be granted to- the manufacturers of dye-stuffs, and some were not ; 
the manufacturers of tanned foreign goat and sheep skins desired 
the removal of the tariff on such skins ; those who tanned them,, and 
who were much less numerous, were equally tenacious in main- 
taining the tariff on the raw skins; and the same conflict arose be- 
tween other interests. 

D. THE UNDERWOOD-SIMMONS TARIFF ACT. 
94, Theory of a Competitive Tariff. 

It is a fact that in many lines of business the system of protec- 
tion has been carried to such a point as to put business into an arti- 
ficial condition and to induce the upbuiMing of many establishments 
not needed and so uneconomically conducted as to prelude them 
from doing business except by virtue of special favor granted them 
through Government action. If these establishments stood alone 
today, there would be no reason why the special privileges accorded 
to them should not be instantly wiped out. If as a result of the 



THE TARIFF PROBLEM 163 

elimination of excessive protection, ill-equipped and badly organ- 
ized factories should find it necessary to discontinue operations, the 
countrv' would be the richer on that account, since its capital would 
be diverted into productive channels, and it would be enabled to 
devote itself exclusively to healthy enterprises yielding a reason- 
able return. 

The business enterprises which have been artificially created 
at an unwarranted expense do not stand alone, but have staffs of 
employees who are immediately concerned in their maintenance and 
to whom the necessity of shifting their occupation would be a 
hardship. There are complex commercial relationships partially de- 
veloped under or dependent upon the existing tariff which it would 
be unfair and unwise suddenly to disturb. This does not mean 
that there should never be a beginning in the task of eliminating 
these evils. On the contrary, it shows the necessity of beginning 
the task promptly. It, however, emphasizes the necessity of carry- 
ing through the transition to a state where business enterprises 
will be obliged to rest upon their own bases without Government 
support, in such a way as to avoid unnecessary jars to trade, and 
to give every opportunity for reasonable adjustment, so that the 
shift may be made without unnecessary displacements of labor and 
capital. The committee has had these facts in mind in the prepar- 
ation of H. R. 3321, and the attempt has been made — 

1. To eliminate protection of profits and to cut off the duties 
which enable industrial managers to exact a bonus for which no 
equivalent is rendered. 

2. To introduce in every line of industr}^ a competitive tariff 
basis providing for a substantial amount of importation, to the end 
that no concern shall be able to feel that it has a monopoly of the 
home market gained other than through the fact that it is able to 
furnish better goods at lower prices than others. 

It is felt that tariff schedules aiming at these two conditions can 
damage no legitimate industry' and is the least that can be asked 
by those who desire the consumer to be safeguarded in some meas- 
ure against exploitation by monopolies that now practically dictate 
prices in the domestic field. 

Where the tariff rates balance the difference in cost at home 
and abroad, including an allowance for the dift'erence in freight 
rates, the tariff must be competitive, and from that point downward 
to the lowest tariff that can be levied it will continue to be competi- 
tive to a greater or less extent. Where competition is not inter- 
fered with by levying the tax above the highest competitive point, 
the profits oi the manufacturer are not protected. On the other 



1 64 READINGS IN ECONOMIC PROBLEMS 

hand, when the duties levied at the custom house are high enough to 
allow the American manufacturer to mal-ce a profit before his com- 
petitor can enter the field, we have invaded the domain of the 
protection of profits. In our judgment the protection of any profit 
must of necessity have a tendency to destroy competition and create 
monopoly, whether the profit protected is reasonable or unreason- 
able. 

We should bear in mind that to establish a business in a foreign 
country requires a vast outlay, both in time and capital. Should the 
foreign manufacturer attempt to establish himself in this countrv, 
he must advertise his goods and establish selling agencies and points 
of distribution before he can successfully conduct his business. 
After he has done so, if the home producer is protected by a law 
that not only equals the difference in cost at home and abroad, 
but also protects a reasonable or unreasonable profit, it is only neces- 
sary for him^ to lower his prices slightly below the point that the 
law has fixed to protect his profits and his competitor must retire 
from the country, or become a bankrupt, because he would then 
have to sell his goods at a loss, and not a profit. The foreign manu- 
facturer having retired, the home producer could raise his prices 
to any level that competition would allow him, and it is not probable 
that the foreigner, who had already been driven out of the country, 
would return, no matter how inviting the field, as long as the law 
remained on the statute books that would enable his competitor 
to put him out of business. 

Thirty or forty years ago, with a large number of small manu- 
facturers, honest competition, no> attempt tO' restrict trade, and a 
home market more then able to consume the production of our 
mills and factories, the danger and the injury to the consumer of 
the country was neither so great nor so apparent as it is today, 
when the control of many large industries has been concentrated in 
the hands of a few. Domestic competition then regulated prices 
to a reasonable extent even where foreign competition was pro- 
hibited. When we ceased having competition at home, and the law 
prohibits competition from abroad by protecting profits, there is 
no relief from the consumer except to- cry for Government regu- 
lation. There is no more reason or justice in having the Govern- 
ment attempt to protect the profits of the manufacturers and pro- 
ducers of this country than there would be to protect the profits 
of the merchant or the lawyer, the banker or the farmer, or the 
wages of the laboring man. 

Which is the wiser course for our Government to take? The 
one that demands the protection of profits, the continued policy of 



THE TARIFF PROBLEM 165 

hot-house growth for our industries — the stagnation of development 
that follows where competition ceases — or, on the other hand, the 
gradual and insistent reduction of our tariff laws to a basis where 
the American manufacturer must meet honest competition, where 
he must develop his business along the best and most economical 
lines ; where, when he fights at home to control his market, he is 
forging the way in the development of his business to extend his 
trade in the markets of the world. In our judgment the future 
growth of our great industries lies beyond the seas. 

95. Excerpts from the Underwood-Simmons Act. 

Section I. 
Schedule A. — Chemicals, Oils and Paints. 

I. Acids: Boracic acid, ^ cent per pond; citric acid, 5 cents 
per pound; formic acid, i^ cents per pound; gallic acid, 6 cents per 
pound; lactic acid, i^ cents per pound; oxalic acid, i^ cents per 
pound ; pyrogallic acid, 12 cents per pound ; salicylic acid, 2^ cents 
per pound ; tannic acid and tannin, 5 cents per pound ; tartaric acid, 
3^ cents per pound; all other acids and acid anhydrides not 
specially provided for in this section, 15 per centum ad valorem. 

5. Alkalies, alkaloids, and all chemical and medicinal com- 
pounds, preparations, mixtures and salts, and combinations thereof 
not specially provided for in this section, 15 per centum ad valorem. 

19. Chloroform, 2 cents per pound. 

48. Perfumery, including cologne and other toilet waters, 
articles of perfumery, whether in sachets or otherwise, and all 
preparations used as applications to the hair, mouth, teeth, or skin, 
such as cosmetics, dentf rices, including tooth soaps, paste, including 
theatrical grease paints, and pastes, pomades, powders and other 
toilet preparations, all the foregoing, if containing alcohol, 40 cents 
per pound and 60 per centum ad valorem ; if not containing alcohol, 
60 per centum ad valorem ; floral or flower water containing no 
alcohol, not specially provided for in this section, 20 per centum ad 
valorem. 

Schedule B. — Earth, Earthenware and Glassware. 

74. Plaster rock or gypsum, crude, ground or calcined, pearl 
hardening for paper makers' use; white, non-staining Portland ce- 
ment, Keene's cement or other cement of which gypsum is the com- 



1 66 READINGS IN ECONOMIC PROBLEMS 

ponent material of chief value, and all other cements not specially 
provided for in this section, lo per centum ad valorem. 

91. Spectacles, eyeglasses and goggles, and frames for the 
same, or parts thereof, finished or unfinished, 35 per centum ad 
valorem. 

99. Freestone, granite, sandstone, limestone, lava, and all other 
stone suitable for use as .mionumental or building stone, except 
marble, breccia, and onyx, not specially provided for in this section, 
hewn, dressed, or polished, or otherwise manufactured, 25 per 
centum, ad valorem ; unmanufactured, or not dressed, hewn, or pol- 
ished, 3 cents per cubic foot. 

100. Grindstones, finished or unfinished, $1.50' per ton. 

Schedule C. — Metals and Manufactures of. 

102. — Chrome or chromium metal, ferrochrome or ferrochro- 
mium, ferromolybdenum, ferrophosphorus, ferrotitanium, ferro- 
tungsten, ferro vanadium, molybdenum, titanium., tantalumi, tung- 
sten or wolfram metal, and ferrosilicon, and other alloys used in 
the manufacture O'f steel, not specially provided for in this section, 
15 per centum ad valorem. 

no. Steel bars, and tapered or beveled bars; mill shafting; 
pressed, sheared, or stamped shapes, not advanced in value or con- 
dition by any process or operation subsequent to the process of 
stamping ; hammer molds or swaged steel ; gun-barrel molds not in 
bars; all descriptions and shapes of dry sand, loam, or iron molded 
steel castings, sheets, and plates; all the foregoing, if made by the 
Bessemer, Siemens-Martin, open-hearth, or similar processes, not 
containing alloys, such as nickel, cobalt, vanadium, chromium, tungs- 
ten or wolfram, molybdenum, titanium, iridium,, uranium, tantalum, 
boron, and similar alloys, 8 per centum ad valorum; steel ingots, 
cogged ingots, blooms and slabs, die blocks or blanks ; billets and 
bars and tapered or beveled bars; pressed, sheared, or stamped 
shapes not advanced in value or condition by any process or opera- 
tion subsequent to the process of stamping; hammer molds or 
swaged steel ; gun-barrel molds not in bars ; alloys used as substi- 
tutes for steel in the manufacture of tools ; all descriptions and 
shapes of dry sand, loam, or iron molded castings, sheets, and plates ; 
rolled wire rods in coils or bars not smaller than twenty one-hun- 
dredths of one inch in diameter, and steel not specially provided for 
in this section, all the foregoing when made by the crucible, electric, 
or cementation process, either with or without alloys, and finished 
by rolling, hammering, or otherwise, and all steels by whatever 



THU TARIFF PROBLEM 167 

process made, containing' alloys such as nickel, cobalt, vanadium, 
chromium, tungsten, wolfram, molybdenum, titanium, iridium, ura- 
nium, tantalum, boron, and similar alloys, 15 per centum ad valorem. 

Schedule E. — Sugar, Molasses, and Manufactures of. 

177. S.ugars, tank bottoms, sirups of cane juice, melada, con- 
centrated melada, concrete and concentrated molasses, testing by 
the polariscope not above seventy-five degrees, seventy-one one- 
hundredths of i per cent per pound, and for every additional de- 
g'ree shown by the polariscopic test, twenty-six ome-thousandths of 
I cent per pound additional, and fractions of a degree in propor- 
tioin; molasses testing not above forty degrees, 15 per centum ad 
valorem ; testing above forty degrees and not above fifty-six de- 
grees, 2^ cents per gallon; testing above fifty-six degrees, 4^ 
cents per gallon; sugar drainings and sugar sweepings shall be sub- 
ject to duty as molasses or sugar, as the case may be, according to 
polariscopic test : Provided, That the duties imposed in this para- 
graph shall be efi^ective on and after the first day of March, nine- 
teen hundred and fourteen, until which date the rates of duty pro- 
vided by paragraph two hundred and sixteen of the tariff Act ap- 
proved August fifth, nineteen hundred and nine, shall remain in 
force : Provided, however. That so much of paragraph two- hundred 
and sixteen of an Act to- provide revenue, equalize duties, and en- 
courage the industries oi the United States, and for other purposes, 
approved August fifth, nineteen hundred and nine, as relates to the 
color test denominated as Number Sixteen Dutch standard in color, 
shall be and is hereby repealed : Provided further. That on and 
after the first day of May, nineteen hundred and sixteen, the articles 
hereinbefore enumerated in this paragraph shall be admitted free of 
duty. 

Schedule G. — ^Agricultural Products and Provisions. 

188. Barley, 15 cents per bushel of forty-eight pounds. 

193. Rice, cleaned, i cent per pound ; uncleaned rice, or rice 
free of the outer hull and still having the inner cuticle on, V^ of i 
cent per pound. 

195, Butter and butter subtitutes, 2^ cents per pound. 

196. Cheese and substitutes therefor, 20 per centum ad valorem. 

205. Hay, $2 per ton. 

206. Honey, 10 cents per gallon. 

213. Straw, 50 cents per ton. 

214. Teazels, 15 per centum ad valorem. 



1 68 READINGS IN ECONOMIC PROBLEMS 

Schedule K. — Wool and Manufactures of. 

286. Combed wool or tops and roving or roping made wholly 
or in part of wool or camel's hair, and on other wool and hair which 
have been advanced in any manner or by any process of manufacture 
beyond the washed or scoured condition, not specially provided for 
in this section, 8 per centum ad valoremi. 

288. Cloths, knit fabrics, felts not woven, and all manufactures 
of every description made, by any process, wholly or in chief value 
of wool, not specially provided for in this section, 35 per centum ad 
valorem ; cloths if made in chief value of cattle hair or horse hair, 
not specially provided for in this section, 25 per centum ad valorem ; 
plushes, velvets, and all other pile fabrics, cut or uncut, woven or 
knit, whether or not the pile covers the entire surface, made wholly 
or in chief value of such plushes, velvets, or pile fabrics, 40 per 
centum ad valorem ; stockings, hose and half hose, made on knitting 
machines or frames, composed wholly or in chief value of wool, not 
specially provided for in this section, 20 per centum ad valorem ; 
stockings, hose and half hose, selvedged, fashioned, narrowed, or 
shaped wholly or in part by knitting machines or frames, or knit 
by hand, including such as are commercially known as seamless 
stockings, hose and half hose, and clocked stockings, hose and half 
hose, gloves and mittens, all of the above, composed wholly or in 
chief value of wool, if valued at not more than $1.20 per dozen 
pairs, 30 per centum ad valorem; if valued at more than $1.20 per 
dozen pairs, 40 per centum ad valorem; press cloth composed of 
camel's hair, not specially provided for in this section, 10 per cent- 
um ad valorem. 

Schedule N. — Sundries. 

341. Dice, dominoes, draughts, chessmen, chess balls, and bil- 
liard, pool, bagatelle balls, and poker chips, of ivory, bone, or other 
materials, 50 per centum ad valorem. 

347. Feathers and downs, on the skin or otherwise, crude or 
not dressed, colored, or otherwise advanced or manufactured in any 
manner, not specially provided for in this section, 20 per centum ad 
valorem ; when dressed, colored, or otherwise advanced or manu- 
factured in any manner, and not suitable for use as millinery orna- 
ments, including cjuilts of down and manufactures of down, 40 per 
centum ad valorem ; artificial or ornamental feathers suita!ble for 
use as millinery ornaments, artificial and ornamental fruits, grain's 
leaves, flowers, and stems or parts thereof, of whatever material 
composed, not specially provided for in this section, 60 per centum 



THB TARIFF PROBLEM . 169 

ad valorem ; boas, boutonnieres, wreaths, and all articles not specially 
provided for in this section, composed wholly or in chief value of 
any of the feathers, flowers, leaves, or other material herein men- 
tioned, 60 per centum ad valorem: Provided, That the importation 
of aigrettes, egret plumes or so-called osprey plumes, and the feath- 
ers, quills, heads, wings, tails, skins, or parts oi skins, of wild birds 
either raw or manufactured, and not for scientific or educational 
purposes, is hereby prohibited; but this provision shall not apply to 
the feathers or plumes of ostriches, or to^ the feathers or plumes 
of domestic fowls of any kind. 

Free List. 

387. Acids: Acetic or pyroligneous, arsenic or arsenious, car- 
bolic, chromiic, fluoric, hydrofluoric, hydrochloric or muriatic, nitric, 
phosphoric, phthalic, prussic, silicic, sulphuric or oil of vitriol, and 
valerianic. 

389. Acorns, raw, dried or undried, but unground. 

391. Agricultural implements: Plows, tooth and disk harrows, 
headers, harvesters, reapers, agricultural drills and planters, mowers, 
horserakes, cultivators, thrashing machines, cotton gins, machinery 
for use in the manufacture of sugar, wagons and carts, and all other 
agricultural implements of any kind and description, whether spe- 
cifically mentioned herein or not, whether in whole or in parts, in- 
cluding repair parts. 

407. Ashes, wood and lye of, and beet-root ashes. 

457. Cofifee. 

512. Ice. 

513. India rubber, crude, and milk of, and scrap or refuse india 
rubber, fit only for remanufacture. 

586. Rags, not otherwise specially provided for in this section. 

652. Original paintings in oil, mineral, water, or other colors, 
pastels, original drawings and sketches in pen and ink or pencil and 
water colors, artists' proof etchings unbound, and engravings and 
woodcuts unbound, original sculptures or statuary, including not 
more than two replicas or reproductions of the same. 

Se^ction IV. 

I. That all goods, w^ares, articles, and merchandise manufac- 
tured wholly or in part in any foreign country by convict labor shall 
not be entitled to entry at any of the ports of the United States. 

J. Subsection 7. That a discount of 5 per centum on all duties 
imposed by this Act shall be allowed on such goods, wares, and 



1 70 



READINGS IN ECONOMIC PROBLEMS 



merchandise as shall be imported in vessels admitted tO' registration 
under the laws of the United States : Provided, that nothing- in this 
sub-section shall be so construed as to abrogate or in any manner 
impair or affect the provisions of any treaty concluded between the 
United States and any foreign nation. 



E. THE CASE FOR PROTECTION. 
96. Protection and Industrial Transformation. 

BY P^RIIJDRICH IvIST. 

The transition from the savage to the pastoral, and from the 
pastoral to the agricultural state is very efficiently promoted by free 
intercourse among nations. The elevation of an agricultural people 
to the condition of countries at once agricultural, manufacturing, 
and commercial, can only be accomplished under free trade when 
the various nations engaged at the time in manufacturing are in the 
same degree of civilization. 

But some of them, favored by circumstances, having distanced 
others in manufactures, commerce, and navigation, have adopted 
and still persevere in a policy well adapted to give them the monop- 
oly of manufactures, and to impede the progress of less advanced 
nations or those in a lower degree of culture. The measures en- 
forced by such nations are called the protective system. 

The anterior progress of certain nations and foreign commercial 
legislation have compelled inferior nations to look for special means 
of effecting their transition from the agricultural to the manufac- 
turing stage in industry, and as far as practicable, by a system of 
duties, to- restrain their trade with more advanced nations aiming at 
a manufacturing monopoly. The system, of import duties is conse- 
quently a natural consequence of the tendency of nations to seek for 
guarantees of their existence and prosperity, and to establish and 
increase their weight in the scale of national influence. Such a 
principle is rendered reasonable only so far as it renders easy the 
economical development of a nation. 

Such restrictions are of the greatest importance because of the 
impetus which they give to the division of labor. Individuals would 
be in vain laborious, economical, ingenious, enterprising, intelligent, 
and moral, without a division oi labor, and a cooperation of produc- 
tive power. The principle of the division of labor has been hitherto 
but imperfectly understood. Industrial production depends to a 
great extent upon the moral and material association of individuals 



THE TARIFF PROBLEM 171 

for a common end. This principle extends to every kind of industr)^ 
The division of labor and the combination of productive powers 
take place in a nation when the intellectual power is applied so as to 
cooperate freely and efficiently with national production. A merely 
agricultural people, in free intercourse with manufacturing and trad- 
ing nations, will lose a considerable part of their productive power 
and natural resources, which must remain idle and unemployed. It 
can possess neither an important navigation, nor an extensive trade ; 
its prosperity, so far as it results from external commerce, may be 
interrupted, disturbed, or annihilated by foreign legislation or by 
war. 

97. What Protection Has Done.* 

BY ROBE:rT EIvIvIS THOMPSON. 

The policy of protection is challenged now to justify itself by its 
works at the bar of public opinion. We are not afraid of that test. 
We ask your attention to its broad results. 

It has raised the average of our national wealth from $514 a 
head (slaves included) in 1850, to $870 a head in 1880. 

It has increased the value of our manufactures five hundred per 
cent, and that of our foreign commerce in the same ratio, while the 
commerce of England increased but three hundred and fifty per cent. 

It has secured higher wages to our workmen and better prices 
to our farmers, without increasing to either the cost of staple manu- 
factures, as is shown by comparing the prices of textiles and hard- 
wares before and since i860. 

It has diversified our industries and raised our people out of that 
uniformity of occupation which is the mark of a low industrial devel- 
opment. 

It has stimulated inventions and improvements to the degree that 
some of the great staples of necessary use have been permanently 
cheapened to the whole world. 

It has drawn the different sections of the country into closer bus- 
iness relations, and has interlaced the great trunk lines oi railroad 
to the West with others running Southward. 

It has brought the foreign artizan across the ocean, and has nat- 
uralized his craft on our shores, whereas Free Trade would have 
brought his work only. 

It has made us as regards the great staples independent of all 

* Written in 1886. 



172 READINGS IN ECONOMIC PROBLEMS 

other countries in case of war, while it has consolidated the national 
unity and increased the national strength to a degree that makes the 
rest of mankind anxious to be at peace with us. 

It has created a sentiment in favor of this policy so powerful 
that no political party ventures to- oppose it openly, and such that 
the friends of Free Trade are hardly heard in our national cam- 
paigns. 

98. Free Trade Destroys the Farm. 

ANONYMOUS. 

There is no argument in favor of protection which the advocates 
of free-trade find it so difficult to assail, with any show of success, 
as the one against the policy of exporting to foreign countries the 
fertilizing constituents of the soil in the shape of raw materials. It 
is a proposition too plain to be disputed, that a bushel of wheat, a 
bale of cotton, or a tierce of rice, embodies a certain quantity of 
those earthy elements whose presence on farm or plantation is indis- 
pensable tO' the growth oi the several productions. Transport the 
grain, fibre, or kernel far away from the region where it is culti- 
vated, and forthwith a portion of the fructifying components of the 
land is forever transferred, permanently diminishing the productivity 
to that extent. South and West we find innumerable examples of 
this butchery of the soil, attributable to the lack of that home mar- 
ket which it is the province of protection to supply, and which it 
invariably supplies in time, under a wise and stable application of its 
beneficent principles. 

Already throughout the cotton belt have an immense number of 
acres, once yielding the greatest abundance, been turned into open 
fields, and abandoned to sedge-broomi, fox-glove, and fennel — steril- 
ity resulting from the very cause we are considering. New planta- 
tions, carved out of the surrounding forests, have taken the place of 
these worn-out lands, to undergo, in their turn, a like impoverish- 
ment and desertion. Whole counties in the long-settled portions of 
the South have suffered such deterioration of productivity, as to 
drive the wealthier classes to seek homes in other localities, where 
a virgin soil was open to occupation, or where dwindling fruitless- 
ness was yet in its early stages. 

Similar conditions surround the area devoted to the growth of 
grain. Ever)^ succeeding twelvemonths there is a diminution in the 
capacity of the soil to yield the same number of bushels to the acre 
as during the previous season ; and wdiile there is this continuous 
falling off in absolute quantity, there is a deterioration in quality, 



THB TARIFF PROBLEM 173 

imperfection naturally resulting from the increasing scarcity of 
those fructifying elements necessary to the sustenance of the crop. 
At the rate this impoverishment of land is going on, it cannot be a 
great many years more before the West must cease to be the granary 
of the United States. 

Out of these facts arise some considerations vital to the welfare 
and prospects of the agricultural classes. He who tills the soil 
under the disadvantage of diminishing fertility is not only constant- 
ly depreciating the value of his land, but is making the same invest- 
ment of labor, skill, experience, and money annually less remuner- 
ative. The more distant he is from, market, the greater is the tax 
of transportation to which he is subjected, the smaller to him is the 
net result of his investment of capital and effort, and the more re- 
stricted is he in the choice oi the crops he will cultivate. The only 
practicable way to export to foreign coimtries, or tO' distant marts, 
these highly valuable and remunerative products of agriculture, is 
to convert them into iron, steel, hardware, linen, cotton, and woolen 
fabrics — in other words, to^ have them consumied on the spot by a 
manufacturing population, and thus made part of the cost of trans- 
forming other raw materials into compact commodities that can be 
cheaply transported long distances. 

Free-trade operates to put distance between the farmer and his 
markets ; protection operates to diminish the distance between the 
two. Free-trade practically encourages the impoverishment of the 
soil, by fostering the policy which exports its fertilizing elements to 
foreign countries ; protection reinforces the productivity of land, by 
providing a regular and unfailing means of speedily returning to it, 
at small expense, the nutritive properties abstracted by the successive 
crops. Free-trade undertakes to show or, rather, takes for granted 
that manufacturing industry and tillage are not necessarily con- 
nected and interdependent ; protection demonstrates by the logic of 
facts, figures, and experience, that they move hand in hand, in in- 
dissoluble alliance. Free-trade tends to make a few great com- 
mercial towns and a thinly-settled, poor interior country ; protec- 
tion operates for the benefit of those in the interior, in a far greater 
ratio '. than for those near the coasts and ports. Free-trade as- 
sumes that we can dispose of enough exports abroad to pay for 
an unlimited quantity of imports ; protection proves that we can 
export only certain descriptions of articles, and those only to- coun- 
tries where the money price is higher than with us, whether we take 
their sroods or not. 



174 READINGS IN ECONOMIC PROBLEMS 

gg. America's Allegiance to Protection. 

BY ALBERT J. LKFPINGWEU,. 

* I intend to state a few propositions, which, as generally accepted 
facts, appear tO' me to influence very largely the national acquies- 
cence of America in the protective policy. Perhaps they may be 
heard with more patience from one who' has never had the slightest 
connection with the manufacturing interest; who ought apparently 
to clamor for the cheapest market, but whoi is nevertheless, for the 
following reasons, a firm adherent to< the protective system : 

1. No country of modern times, which is without manufactures, 
which exports raw products for foreign made goods, and the inhab- 
itants O'f which are almost wholly engaged in cultivating the soil, 
has succeeded in obtaining wealth, prosperity, and power as a na- 
tion. This simple fact is recognized by every civilized government 
in the world. Free-trade at the present day is either an English 
or a barbarous practice. Even English colonies perceive that they 
must build up their home. industries if they are ever tO' gain essential 
prosperity. Just so far as Free-Trade contributes to the supremacy 
of British manufactures, it is a means towards the maintenance of 
national wealth and power. If it shall ever cease to do this, it will 
be abandoned. 

2. If, during the past fifty years, America had permitted a sys- 
tem O'f unrestricted trade with all the world, she could never have 
reached the development of her manufactures which has rendered 
her independent ; but would, today, be little more than a huge agri- 
cultural colony, exchanging the produce of her fields for the manu- 
factures and fabrics oi Europe. To' be a nation of farmers, to ex- 
cell in sheep-raising and in agriculture^ — this is the English ideal 
of what America ought to content herself with being. If there ex- 
isted between the United States and England a perfectly free and 
open trade, a distribution of industr}^ unfettered by tariffs, England 
would be the manufacturing member, and the United States the 
agricultural member of the partnership. 

3. Under the system of protection America has been able to 
develop her boundless mineral resources, to encourage the growth 
of her manufacturing industries, until, today, she is not merely inde- 
pendent and able to supply her own wants, but she exports to for- 
eign nations, and has begun to compete with England for the mar- 
kets of the world. Conclusive evidence of this exists on all sides. 
The careful observer can not escape it. 

4. A protective tariff has been the most important, and, indeed, 
the essential agent, in the development of the mianufacturing Indus- 



THE TARIFF PROBLEM 175 

tries of the United States. This proposition can hardly be seriously 
denied at the present time. Through the enhanced prices paid at 
first by consumers, manufactures have been created and fostered. 
Perhaps for a while they have been very costly to the nation. But 
of the result the country can well be proud. It has made them inde- 
pendent of other nations for their supplies. And, in the end, with 
growth and improvements, goods have fallen in price, greatly to- the 
benefit of the American consumer. 

5. The working class in the United States, under a system of 
protection, enjoy a .greater degree of prosperity than the working 
classes of England under a system of Free-Trade. No' test can be 
more satisfactory and practical than to compare the position of the 
laborer in one country with his position in another ; and, however 
difficult it may seem at first thought to weigh in the balances privi- 
lege, opportunity, comfort, and general prosperity, certain financial 
facts and statistics afford us a tolerably safe method for arriving at 
sound conclusions. That the working man here, if thrifty, has a 
far better chance for improving his condition, for educating his fam- 
ily, for acquiring landed property than is the case with his brother 
in Europe is generally admitted. It could not well be otherwise 
where one may soi easily exchange the forge or loom for the settler's 
cabin and the plow. Although an impression prevails that tax bur- 
dens here are onerous, the American working-man in reality pays 
less than half the tax to which the British workman is subjected. 
The whole burden of local taxation falls entirely upon the landed 
class. The taxes upon houses fall upon the owner of the property. 
The great mass of the American working people are better housed, 
better fed, clothed, and in all respects better situated than the work- 
ing millions of the nations whose ports are open tO' the world. 

These are some of the reasons which appear to me to largely de- 
termine the persistent allegiance tO' the doctrine of Protection by the 
people of the United States. Of the ultimate adoption by nations of 
the principles of absolute Free-Trade I have as little doubt as the 
most sanguine disciple of Adam Smith. But it is a dream of the far- 
distant future. It assuredly cannot be realized while the tramp of 
armies is louder than the din of the work-shop. By America, how- 
ever, the day of its adoption may be much nearer our own time. 
History often repeats itself. Like England, by thorough protection 
of our growing industries, we have laid the foundations of success 
in every branch of manufacture. So soon as our preeminence is 
absolutely assured, there will exist no longer the necessity to pro- 
tect. Of that future we have apparently every reason to hope. 



176 ' READINGS IN ECONOMIC PROBLEMS 

When the production of American skill and industry is found in 
shops in Europe cheaper than their home-made wares, it is probable 
that we shall then take our turn in eulogizing Free-Trade, in open- 
ing our ports to all nations, and in preaching the blessings of unre- 
stricted trade to a reluctant and still doubting world. 

100. Protection and the Formation of Capital. 

BY AI^VIN S. JOHNSON. 

The additions to the capital of a nation miust come from the 
annual income. That the income of a nation will, at any given time, 
attain its maximum under freedom of trade is a proposition that 
admits of only rare exceptions. Does it not then follow that the 
capacity of a nation to accumulate capital will be greater under free 
trade than under protection? If all classes in society saved equal 
proportions of their incomes, it would folloAV of necessity that what- 
ever tends to reduce the national income must reduce the annual 
addition to the fund of capital. But, in fact, the disposition to accu- 
mulate capital varies widely in the different classes that compose a 
nation ; and it is the essence of protection to alter the proportions in 
which the social income is distributed. We cannot, therefore, accept 
without further examination the view that protection and the conse- 
quent reduction of the social income must necessarily retard the ac- 
cumulation of capital. 

Apart from purely individual differences in thrift, the tendency 
to save is affected by general economic and social conditions that en- 
able us to divide the members of society into more or less distinct 
thrift classes. A man is not likely to save, if he knows of no invest- 
ment attractive to him ; he is not very likely to save if the road to the 
esteem of his fellows lies through expenditures for consumption. 

The most attractive form of investment is the acquisition of 
tangible capital goods to be employed under one's own control. 
Such an investment gives visible evidences of economic efficiency. 
Accordingly those who are in a position to make such investments 
have the strongest incentive to save. These persons are entrepre- 
neurs who have not yet fully equipped their businesses with capital. 
Them we may place in our highest thrift class. We may assign to a 
lower thrift class those who live upon salaries or returns from^ pro- 
fessional service. They have no ever-present means of investment ; 
they are under the domination of rigid standards of consumption. 
They must, however, make provision for disability or superannua- 
tion. In a yet lower class I should place those who derive their in- 
comes from rents, interest on mortgages and bonds, dividends on 



THE TARIFF PROBLEM 



177 



stocks, — the funded income class. They are in no peculiarly favor- 
able situation to make new investments; they are subject to rigid 
standards of consumption; and they are under no compulsion to set 
aside a portion of their incomes for future needs. In the lowest 
class of all I place the great mass of workingmen, since they have 
the least favorable opportunity for investment and are subject to the 
most tyrannical standards of consumption. 

When an industry reaches the acme of development, the position 
of the independent entrepreneur becomes assimilated to that of the 
recipient of funded income. Accordingly we are justified in draw- 
ing a distinction between the entrepreneur engaged in an industry 
which quickly attains its full development and those engaged in an 
industry of practically unlimited development. Thus we arrive at 
the conclusion that the richest and most enduring sources of new 
capital are the interest and profits of the manufacturing entrepre- 
neur class. 

A practical tariff system cannot bestow all its benefits upon a 
higher thrift class and impose all its burdens upon a lower one. Nev- 
ertheless it can hardly be denied that the chief benefits of modern 
protectionism have been bestowed upon those engaged in capitalistic 
enterprise. In the United States protection, down to the present day, 
has meant little but the diversion of income from all other classes 
in society tO' the capitalist manufacturer. The farmer and wage- 
earner have carried a net burden ; the manufacturer alone has se- 
cured a net gain. Here a rapidly developing agriculture has been 
taxed for the benefit of rapidly developing manufactures. Although, 
under these conditions a high thrift class has been taxed, agricul- 
ture would quickly have attained a state of full development, and 
thus would have ceased to give large incentive to thrift. The im- 
petus given to manufactures, which under modern conditions pos- 
sess almost unlimited power of absorbing capital, must, of itself, 
have accelerated accumulation. It is worth noting that in the long 
run protection in a democratic state must favor the higher thrift 
classes at the expense of the lower. In every state protection is 
essentially a minority interest. The export industries can gain noth- 
ing from the policy ; industries that supply a purely local demand also 
gain nothing. These two groups of industries outweigh the indus- 
tries which would suffer under competition. The number of persons 
whose incomes are diminished by protection will greatly exceed the 
number of persons whose incomes are enlarged by it. 

If it is true that the general tendency of modern protection. has 
been to divert income from a lower to a higher thrift class we are 
justified in saying that protective duties have played a part in equip- 



178 READINGS IN ECONOMIC PROBLEMS 

ing modem society with the A^ast stock of capital goods which \t 
now possesses. For proof of this we must have recourse to an analy- 
sis of the effects of protection upon capital fo'rmation in concrete 
instances. Let us suppose that in a country which formerly im- 
ported its silk a heavy duty is levied with the object of creating a 
silk-manufacturing industry at home. Men, intending to invest 
otherwise, are induced to go into the silk business. At the begin- 
ning the capital goods with which the new industry is equipped rep- 
resent no net addition to the productive wealth of the country. But 
a new industry is naturally speculative in character; and the more 
conservative entrepreneurs are slow to enter it. In the nature of the 
case the industry will be undersupplied with capital. This means 
that capital will be more than ordinarily productive in the industry ; 
it means further that entrepreneurs will be steadily endeavoring to 
secure more capital to expand their operations. ' Under these cir- 
cumstances it is inevitable that a large proportion of the profits cre- 
ated by the industry will be reinvested in it. Here then we have a 
net addition to the productive wealth of the country. 

We arrive at practically the same result if we select a commodity 
entering chiefly into the consumption of the wage-earners. A large 
proportion of the wage-earning class saves practically nothing, 
whether wages are high or low. Standards oi consumption tend to 
absoirb any surplus income that may appear. A duty borne by the 
wage-earning class places little check upon accumulation. Thus the 
main effect of the duty is to divert income from a lower thrift class 
to a higher one, and hence to give an impetuis to the formation of 
capital. 

In answer tO' this line of argument it is alleged that a tariff con- 
structed in such a way as to equalize costs of production at home and 
abroad would not permit the surplus profits out of which capital is 
built. This is true. But one miay safely challenge all the economists 
in the world to point to one instance of a "scientific" tariff. In the 
nature of things, there can be no such tariff. What manufacturers' 
association would conduct political campaigns, roll logs, and other- 
wise exert itself for the mere privilege of being placed on an equal- 
ity with the foreigner? What would be the object in establishing 
a new industry if it were to offer only profits that might be secured 
from industries already existing? 

It is true that if the protected industry operates under great nat- 
ural disadvantages, as in the classical case of producing wine in 
Scotland, the burden to the consumer will be so much greater than 
the net gain of the producer that the net effect upon accumulation 



THE TARIFF PROBLEM 179 

will be unfavora'ble. But it is not the practice of entrepreneurs to 
demand, nor of statesmen to grant, protection for industries that 
labor under extraordinary disadvantages. Rather the selection of 
industries for protection tends to be such that a greater part of the 
tribute exacted from the consumer is bestOiwed upon the producer in 
the form oi profit instead of being wasted in the insane struggle with 
refractory natural conditions. 

What is the test by which it can be determined whether the pro- 
tective system shall be abandoned? By the academlic protectionists, 
duties should be abolished when the protected industries are in a po- 
sition to meet foreign competition. According toi the theory here 
put forth, they should not be removed until the protected industries 
cease to develop rapidly. Then the duty should be removed whether 
the industry can meet foreign competition or not. 



F. THE CASE AGAINST PROTECTION. 
loi. Infant Industries and the Tariff. 

BY P. W. TAUSSIG. 

Of the arguments waged in favor of protection, probably the 
one carrying the most weight is the infant industry argument. Its 
essential point lies in the assumption that the causes which prevent 
the rise of the industry, and render protection necessary, are not 
natural and permanent. There are two sets of conditions under 
w'hich these causes may operate. First, there is the state of things 
in a new country rapidly growing in population when there is a nat- 
ural change from exclusive devotion to extractive industries toward 
greater attention to manufacturing, and when this change may be 
retarded longer than the time when it might advantageously take 
place: secondly, when great improvements take place in some of the 
arts of production, it is possible that the new processes may be re- 
tained in the country in which they originate, and may fail to be 
applied in another country, through ignorance, inertia, or restrictive 
legislation. 

Both these sets of conditions seem to have been fulfilled in the 
United States in the beginning of the present century. The country 
was normally emerging from that state of almost exclusive devotion 
to agriculture which had characterized the colonies. At the same 
time enormous changes were taking place in the mechanical arts, and 
new processes were revoiutionizing the methods of mianufacturing. 



i8o READINGS IN ECONOMIC PROBLEMS 

Under these circumstances there seems to have existed room for the 
legitimate application of protection for young industries. 

Let us examine the early histo'ry of- the protection afforded to 
the woolen industry. The first attempt at making woolens in large 
quantities is said to have been made at Ipswich, Mass., in 1792; but 
no machinery seems to have been used in this undertaking. In 1794 
machinery was for the first time used, introduced by an English 
workman. He substituted carding-machinery for hand-cards. Card- 
ing-machines were introduced in a few other places between 1800 
and 1808. When the period of restriction began in 1808, the woolen 
manufacture received a powerful stimulus. The prices of broadcloth 
rose enormously, as did those O'f flannels, blankets, and other goods, 
which had previously been obtained almost exclusively by importa- 
tion. The manufacture of woolen goods began, and was consider- 
ably extended. In 1810 the carding and spinning oi wool by ma- 
chinery was begun in some of the cotton mills in Rhode Island. 

After 181 5 the makers of woolens naturally encountered great 
difficulties in face of the renewed and heavy importations of English 
goods. The tariff of 1816 gave them the same duty that was levied 
on cottons, — 25 per cent. Wool was admitted at a duty of 15 per 
cent. The scheme of duties, under the tariff of 1816, thus afforded 
no very rigorous protection. The provisions of the act of 1824 did 
not materially improve the position of the woolen manufacturers. 
The duty on woolen goods was in that act raised to 30 per cent in the 
first instance, and to 33 1/3 per cent after 1825. At the same time 
the duty on wool was raised to 20 per cent in the first place, to 25 
per cent after 1825, and tO' 30 per cent after 1826. 

Notwithstanding this very moderate encouragement, the woolen 
manufacture steadily progressed, and in 1828 was securely estab- 
lished. During 182 1 and 1822 large investments were made in fac- 
tories for making woolen cloths, especially in New England. The 
best evidence which we have of the condition of the industry during 
these years is to be found in the testimony given in 1828 by various 
woolen manufacturers before the Committee on Manufactures of 
the House of Representatives.. This shows clearly that the industr}'' 
was established on such a scale that the difficulties arising from lack 
of skill and experience, unfa,miliarity with machinery and methods, 
and such other temporary obstacles, has no longer influence to pre- 
vent its growth. The evidence shows that the mere cost of manu- 
facturing was not greater in the United States than in England, and 
that the woolen manufacture had reached that point at which it 
might be left to sustain itself. In 1828, when for the first time heavy 



THB TARIFF PROBLEM 



l8l 



protection was given by a complicated system of minimnm duties 
and the actual rates levied rose, in some cases to over loo per cent, 
this aid was no longer needed to sustain the woolen mianufacture. 

The events of the period of restriction, from 1808 to 1815, led 
to the introduction of the industry, and gave it a strong impulse. 
These were equivalent to effective, though crude and wasteful pro- 
tective legislation ; and it may he that their effect, as compared with 
the absence of growth before 1808, shows that protection in some 
form was needed to stimulate the early growth of the woolen man- 
ufacture. But, by 1815, the work of establishing the manufacture 
had been done. The moderate duties of the period from 18 16 to 
1828, partly neutralized by the duties on wool, may have done some- 
thing to sustain it; but the position gained in 181 5 would hardly 
have been lost in the absence of these duties. By 1828, when strong 
protection was first given, a secure position had certainly been 
reached. Although, therefore, the conditions existed under which 
it is most likely that protection tO' young industries may be advanta- 
geously applied, — a young and undeveloped country in a stage of 
transition from a purely agricultural to a more diversified industrial 
condition ; this transition, moreover, coinciding in time with great 
changes in the arts, which made the establishment of new industries 
peculiarly difficult — little if anything was gained by the costly pro- 
tection which the United States maintained in the first part of this 
century. Two causes account for this. On the one hand, the char- 
acter of the people rendered the transition of productive forces to 
manufactures comparatively easy ; on the other hand, the sudden 
shock to economic habits during the restrictive period from 1808 to 
181 5 effectually prepared the way for such a transition. The politi- 
cal institutions, the high average of intelligence, the habitual free- 
dom of movement from place to- place and from occupation to occu- 
pation also made the rise of the existing system of manufacturing 
production at once more easy and less dangerous than the same 
change in other countries. At the same time it so happened that the 
embargo, the non-intercourse acts, and the war of 18 12 rudely shook 
the country out of the grooves in which it was running, and brought 
about a state of confusion from which the new industrial system 
could emerge more easily than from a well-settled organization of 
industry. The intrinsic soundness of the argument for protection 
to young industries is therefore not touched by the conclusions 
drawn from the history of its trial in the United States. Suffice it 
that the history of early protection to the woolen industry — and the 
argument would hold here if anywhere, — does not warrant giving 
much weight to the infant industries argument. 



1 82 READINGS IN ECONOMIC PROBLEMS 

102. The Limited Industrial Effects o£ Protection. 

BY AI^VIN S. JOHNSON. 

I. Where tzw centres of production compete freely ziHth each 
other one may be able to drive the other out of certain lines of in- 
dustry. One cannot drive the other out of all lines of industry. 

It is often said that the South can manufacture cotton cheaper 
than New England, and that, therefore, since both sections must sell 
their products at practically the same price, cotton manufacture in 
New England is doomed. As the South extends its production, the 
price of cotton goods declines. Possibly some New England mills 
are forced to shut down; others, while continuing in operation, re- 
duce their output. The expansion of the industry in the South in- 
creases the demand for labor and tends to raise its price. The con- 
traction of the industry in New England reduces the dem'and for 
labor, and tends to lower its price. Forces are therefore at work 
reducing the difference between the two centres in labor cost. 

But the wages of cotton operatives depends not only on the for- 
tunes of the cotton industry, hut on the fortunes of other industries 
as well. A reduction in the wages of cotton mill hands in New Eng- 
land causes an efflux of such laibor into other occupations, and this 
tends to check the reduction in wages. In the South rising wages 
in the cotton industry is followed by an influx of laborers from other 
industries, and this tends to check the rise in wages. Yet it is quite 
possible that the South will get a larger and larger share of the 
cotton industry, until it has taken over practically the whole busi- 
ness. 

Now let us suppose that all the industries of the South are in 
competition with all of the industries of New England, and that the 
costs are lower in the former part of the country than in the latter. 
An attempt on the part of all Southern producers to extend their 
outputs immediately forces up the prices of all producers' goods — 
labor, fuel, water power, etc. A tendency on the part of all New 
England producers to restrict production immediately reduces the 
price of producers' goods. It is, then, only for a brief time that 
all costs can be higher in one section than in the other. The higher 
price of labor might indeed induce the whole New England working 
population to migrate to the South; but in no other possible way 
could the volume of New England industry be permanently restrict- 
ed by Southern competition. 

The same reasoning applies to international competition. It is 
folly to talk of the probability that British industry will be driven 
to the wall by German and American competition. Wages and in- 



THE TARIFF PROBLEM 183 

terest in Great Britain may be reduced by foreign competition, and 
this may induce men and capital to emigrate. This would reduce 
the volume of British production, but it is impossible that the British 
manufacturer would in the long run find prices too low tO' cover 
costs. The latter adjust themselves to prices, and fall when general 
prices fall. 

2. Protection of all industries is an impossibility. 

Suppose that the government places prohibitive duties upon all 
imports. Will this not place all industries in a position where they 
may enjoy higher prices? And in that case, will it not be as easy 
for us to pay ten cents a pound for sugar as it now is to pay five? 
A protective tariff, it is often said, is unjust when it singles out a 
few industries and grants them special favors. 

An obvious objection is that if this was possible, if each industry 
was able to charge prices one hundred per cent higher, and each per- 
son, accordingly, received twice as large an income as he would 
otherwise have received, no one would secure any real benefit at all. 
But a more serious objection, is this: no protective duty can raise 
the prices oi all commodities? A duty can raise the price only of 
articles which we are in the habit of importing. Now, if we import 
anything, we must export something to* pay for it, and the export 
commodities must ordinaril}'- represent as great a volume of values 
as the import commodities. 

Now, the price of a commodity that we export must be lower in 
this country than in the countries to which it is sent. The prices of 
wheat and cotton in America must be less than the prices of the same 
articles in England, since we are constantly exporting them. It is 
manifestly absurd to- suppose that by placing duties on wheat and 
cotton imported into the United States we can raise the prices of 
those commodities. Who would wish to import them intoi the United 
States? The duty on any export product is utterly ineffective. Re- 
strictions on imports restrict exports also. They do this by reduc- 
ing the amount of money that the producer for export receives for 
his goods. An "all around" system of duties, in spite of itself, im- 
poses a positive burden on as large a volume of industry as that 
which enjoys special favors under it. 

103. Free-Trade and Depopulation. 

BY C. P". BASTABLU. 

Protectionists often claim for their scheme that it causes the im- 
migration of labor and capital into their territory ; and the same 
view has been taken by persons who deplore the emigration of Eng- 



1 84 READINGS IN ECONOMIC PROBLEMS 

lish employers, caused", it is said, by the desire to get inside the 
tariff barriers of other countries. A modification of this behef is 
found in the assertion that under free-trade population and capital 
would move towards the most fertile parts of the earth's surface, 
leaving the poorer countries desolate, an evil which is to be remedied 
by the aid of a protective system. To deal with this doctrine it is 
only necessary to consider the causes of emigration. So far as they 
are non-economic, they may be disregarded, since an avowedly eco- 
nomic measure will not affect them. The economic motive for mi- 
gration is the hope of gain, which can only be brought into operation 
by the existence of higher profits and wages in the duty-levying 
countries. Duties could, therefore, only draw capital and labor into 
a country which was superior in its resources to that from which 
the labor and capital was drawn, and which would, all things apart, 
have a tendency to attract those agents of production. The only 
possible way in which a protective duty could have the consequence 
attributed to it, is either by widening the margin between the rates 
of profit and wages in the two countries, or by affecting a special 
industry, whose main production was for export. The chief field in 
the working of this force would be in the case of a large as against 
a small country. For instance, Swiss industry has been affected by 
the tariffs of France and Germany, and, were Ireland politically 
separate from. England, some of its industries might, by means of 
protection in England, be transferred to that country. 

To recognize the possibility of a given case is one thing — to 
admit the expediency of creating it is quite another. In the present 
instance the evils of the supposed duties are evident. They lead to 
an artificial and uneconomic distribution of industrial forces, thus 
reducing the total amount of wealth ; they inflict loss on the con- 
sumers of the commodities, whose place of production is to be al- 
tered, while they fail to allow for the natural effect of economic de- 
velopment in promoting the establishment of all profitable employ- 
ments. It cannot be shown that France has profited by the efforts 
to transplant Swiss industries to its soil, nor that Switzerland has 
been injured by such attempts. The general objections to a pro- 
tective system apply in all their strength to this particular applica- 
tion of it. 

The idea that freedom of trade may lead to depopulation rests 
upon a confusion between two different branches of economic action, 
viz., the unrestricted exchange of commodities, wbich is all that free- 
trade prescribes, and the mobility of the industrial factors. The 
latter obviously depends upon entirely different causes, and has little 



THE TARIFF PROBLFM 185 

connection with the particular fiscal policy pursued. Germans emi- 
grate in large numbers to America, Frenchmen prefer to remain at 
home, though both countries are protectionist in policy. In fact the 
probability is that where economic motives are the chief reason for 
emigration, protection will rather increase than diminish their force. 
Increased cost of living is not an inducement to the energetic and 
the prudent to remain in a country, but that is precisely what pro- 
tection tends tO', and we may therefore assert that the fear of depop- 
ulation from free-trade is entirely devoid of practical foundation. 

104. American Free-Trade and American Prosperity. 

BY GEORGE: BADEN-PO'WELI,. 

How far is the prosperity of the United States connected with the 
policy of protection? This c[uestion leads us at oiice among the 
circumstances that combine tO' bring prosperity to- the United States : 
and if we look in vain among these for the influence of protection, 
it may surprise the thoughtless into attention to facts, but it will in 
no wise run counter tO' the convictions of those who know. 

The influence of Protection is lessened by the fact that the Uni- 
ted States is eminently an underpeopled, undeveloped country. This 
fact is at once the basis O'f the national prosperity and the more than 
sufficient antidote to the action of Protection. Evidence oi this is 
seen in the recent high pressure development of the industry of sup- 
plying food to Europe. For some years back this tillage of the 
prairie has produced an enormous surplus of food supplies. These 
would have been mere valueless commodities, or rather would not 
have been produced at all, but for the cheap means of transit to 
European markets. Thus it became wealth ; and was used in great 
measure to repay other nations for some O'f the capital they had 
advanced to render such things possible. Of the total annual ex- 
ports from the United States nearly one-half consists of this food 
surplus. It is thus evident that this production alone of food from 
virgin soil, paying- for two-thirds of what the nation buys abroad, 
is accountable for the major portion of the prosperity enjoyed by 
the United States. But, if tO' this we add the exports of "raw- 
materials" — of cotton, minerals, etc. — we shall account for at least 
eighty per cent of the total annual exports from the United States 
without trenching in the least on the domain fostered by protectio^^. 
It is then not difficult to see that the prosperity of the United States 
depends on industries that have no cause whatever to thank Pro- 
tection. 



1 86 READINGS IN ECONOMIC PROBLEMS 

These industries, however, are rapidly discovering causes for 
curses and not thanks. Farmers find that high tariffs raise the prices 
of agricultural implements ; millers complain of the high cost of 
machinery; carriers oi the high prices of metal work. Experience 
is proving that the duties which protect one class necessarily injure 
all others. The train of cause and effect runs in the well-known 
circle. 

It is no long task to show that the prosperity of the United States 
exists in spite of, and not because oi, Protection. So^ seldonu do we 
remember that absolute Free Trade has been long and firmly estab- 
lished throughout the United States, and that it exerts an influence 
many, many times greater than that exerted by Protection. Free 
Trade reigns absolute and supreme within the frontiers of the United 
States. The full import of this fact is seen when we remember that 
the rapidly increasing population imports from abroad only one- 
quarter of the value of the goods that the British Isles import. And 
the vast and important home market of so very large and so very 
self-dependent a population is regulated entirely on principles of 
absolute Free Trade. 

The importance of this fact is all the more evident if we remem- 
ber that the United States is about as large as Europe, but with only 
one-seventh of the population. We have indeed a territory equalling 
Europe in extent and in variety of soil, climate, and product. -But 
properly to picture the case we must sweep out of Europe all the 
English, Dutch, Danes, Swedes, Germans, Russians, Austrians, Ital- 
ians, Swiss, Spaniards, Portugese, and Turks, and then distribute 
and settle over the whole area of Europe the population of France 
and Belgium only. Then if we add to such distribution of population 
perfect freedom of interchange of products all over this Europe, we 
will have a picture of the condition of the United States at the pres- 
ent day. It ha.s been the dream of Cobden's disciples tO' extend 
Free Trade over Europe. America has long ago and definitely es- 
tablished Free Trade over an area equalling that of Europe. 

It is evident that the prosperity in the United State is due to 
this freedom of exchange and the comparative paucity of the peo- 
ple engaged in the highly profitable task of developing vast virgin 
resources. Of a truth the United States is a glaring instance of the 
high economic value of Free Trade. Protection, influencing only 
by means of a comparatively insignificant import trade, is but a 
weakly drag on this prosperity. It occupies an altogether subordi- 
nate position as the direct factor for or against this prosperity. 



THB TARIFF PROBLEM 187 

105. An Economic and Moral Indictment of Protection. 

BY WILLIAM SMART. 

Relative to the protective tariff, four conclusions seem to sug- 
gest themselves. 

I. That it is beyond the wit of man to draw up a tariff which 
will protect whole ranges of industries without causing all sorts of 
anomalies and inequalities. 

Under Free-Trade, self-interest, urged by competition, directs 
capital into the industries which pay, and buys its material and tools 
wherever it gets them cheapest and best. But Protection, having 
for its object the restriction of competition, taxes goods differently 
according to the circumstances and needs of particular home trades. 
Thus one industry may get in its material at a low rate, because the 
home producers of that material do not need much protection; an- 
other industry which competes with it may have to pay a high rate 
for its material because the home producers are at a natural disad- 
vantage. Every industry, again, under this artificial system, knows 
its own weakness or strength against foreign competition ; but out- 
siders do not know, and every man keeps his own trade secrets. 
Granted, then, that there are in each business experts who know 
just how much Protection is necessary tO' "protect," no legislature 
has the knowledge or the means of getting at the knowledge. If 
the legislature simply asks each industry how much Protection it 
needs, what kind of an answer will it get? Or suppose that a tariff 
is based on the cost of thoroughly efficient homie producers, how 
will this suit the average or the inefficient ? Will it not tend to^ throw 
industry in the hands of great combinations, and end in monopoly? 

II. That Protection tends to political immorality. 

Under Free Trade the statesman is the voice of the nation. With 
him the interests of the wider co^mmunity are always paramount. 
At the very worst, he stands for no selfish or sordid interest. But 
what becomes of the purity of political life when every elector looks 
to his representative to give him a tariff high enough to let him 
earn a profit? Nay, what becomes to- the party to which he belongs 
when the whip calls one way and the vested interests another? 
How, in these circumstances, can the state remain "the armed con- 
science of the community" ? 

III. That Protection tends to^ commercial immorality. 

Law ought not to lead men into temptation. And nations should 
have some regard to the temptation which their laws put in the way 
of other nations. There are very few Englishmen who will not do 
a little smuggling when they cross the channel — the tariffs of other 



1 88 READINGS IN ECONOMIC PROBLEMS 

countries, they argue, are "so irrational." And when it is found fur- 
ther that the administration of tariffs is modifiahle by influence or 
bribery, the temptation to regard the entrance duty as a fair mark 
for ingenuity is all but irresistible. The annals of Protection are 
full of tales of evasion, of connivance, of bribery, — to say nothing 
of smuggling. 

IV. That Protection raises costs and. checks exports. 

Protection raises the price of everything imported, and, as a con- 
sequence, the price of everything made at home. Consequently it 
increases costs and handicaps exports. Only great natural resources, 
great superiority of skill, or production on a very large scale, can 
outweigh this handicap. 



G. THE INFLUENCE OF THE TARIFF ON WAGES. 
1 06. The Early Uses of the Wages Argument. 

BY FRANK W. TAUSSIG. 

About 1840, for the first time, it was argued in behalf of the 
protective tariff, that it protected American labor from the competi- 
tion of cheap foreign labor. In the period preceding the difference 
between the rate of wages in the United States and in Europe had 
furnished an argument for the free-traders. The latter were accus- 
tomed to point to the higher wages O'f labor in the United States as 
an insuperable obstacle to the successful establishment of manufac- 
tures. They asserted that so long as wages were so much lower in 
Europe, manufacturers would not be able to maintain themselves 
without aid from the government. The protectionists, on the other 
hand, felt called upon to explain away the diff'erence in wages ; they 
endeavored to show that this difference was not as great as was 
commonly supposed, and that, as far as it existed, it afforded no 
good reason against adopting protection. About 1840 the positions 
of the contending parties began to change. The protectionists began 
to take the offensive on the labor question; the free-traders were 
forced to the defensive on this point. The protectionists asserted 
that the high duties were necessary to shut out the competition of 
the ill-paid laborers of Europe. Obviously the change in the line of 
argument implies a change in the industrial situation. Such an argu- 
mient in favor of protection could not have arisen at a time when 
protective duties existed in but small degree, and when wages never- 
theless were high. Its use implies the existence of industries de- 



THE TARIFF PROBLEM 189 

pendent on high duties. When the system had been in operation 
for some time, and a body of industries had sprung up which were 
thought to be able to pay current wages only if aided b}^ high duties, 
the wages argument naturally suggested itself. 

107. Protection's Benefits Go to Labor. 

BY THEODORE JUSTICE. 

Another one of the features of the substance of the Dingley 
tariff act is the revelation to us of the elevation of the standard of 
living. It must be admitted by all that the effect of the protective 
tariff has been to elevate the standard of living. The laboring 
classes in the United States enjoy a degree of comfort that is not 
within the reach of the so-called middle classes of Europe. This 
means a great deal, for it proves, what all now admit, that nearly 
the whole of the benefits of protection go to labor. The evidence 
of this is shown in this higher standard of living, which makes the 
home market take 93 per cent of our products. It is' claimed by 
would-be tariff revisers that the cost of living under a protective 
tariff absorbs all the advantages under a higher wage scale, but 
this is not true. This is shown by a comparison of the deposits in 
the savings banks, which represent the accumulations of labor. In 
1897 the deposits were $1,983,000,000, and by July, 1907, they had 
increased to $3,495,000,000, an increase of 76 per cent. 

108. What Fixes the Rate of Wages? 

BY SIMON N. PATTEN. 

The commercial relations of a nation are a determining factor 
in fixing the rate of wages. If two nations freely exchange com- 
modities with each other, the poorest opportunity for labor utilized 
in either of the nations will fix the rate of wages. To make this 
clear contrast two isolated nations, in one of which there is an active 
policy of endeavoring to increase the opportunities for labor as 
rapidly as the increase in population, and in the other a passive pol- 
icy which compels the increase in population to resort to poorer op- 
portunities. In the one country there will be a constant increase in 
the rate of wages, because every increase in the productive power 
would be fairly distributed among all the laborers through the 
opening up of new occupations. In the other nation there will be a 
constant diminution of wages as a result of the increase in rent 
which must follow every resort to poorer natural resources. By 
bringfing the two nations thus far isolated into commercial relations 



IQO 



READINGS IN ECONOMIC PROBLEMS 



the rate of wages in the progressive natioii will be reduced, and ac- 
companying this there will be a corresponding rise in rent. There 
cannot be two prices for commodities upon the same market, and the 
higher price for food and of all raw materials in the less progres- 
sive nation will cause a similar price to be paid for them in the other 
nation, and while this high price is paid the rate of wages will be 
fixed by the poorest opportunity for labor in the less progressive 
country. A nation cannot therefore adopt a system of free trade 
without having its rate of wages determined by the least progressive 
country with which it comies in contact. A nation cannot come into 
free cornmercial relations with a country having cheap labor without 
forcing upon itself the same unequal distribution oi wealth from 
which the other nation suffers. 

log. The Effect of Industrial Changes on Wages. 

BY AI^VIN S. JOHNSON. 

A policy that drazw labor from the fields that are of greater nat- 
ural productiveness to fields of lozver natural productiveness tends 
to reduce wages. 

In any country wages are determined by the marginal productiv- 
ity of labor. We will represent the various opportunities of employ- 
ment that a country like the United States affords by the symbols, 
A, B, C, and D. A may stand for a group of industries in which 
we have exceptional advantages over foreign countries. B stands 
for a group of industries in which our advantages are less, C one 
in which they are still less, and D the group of industries in which 
they are least of all. When our population is so small that all our 
labor can be engaged in the group represented by A, wages will be 
at their maximum. When our population increases so that some 
of the labor will have tO' be set to work in group B, the wages of 
all labor must decline to^ the level of the productivity in that group. 
We will supp'ose that population has increased up to a point where 
the opportunities represented by A and B are fairly well manned, 
and wages are determined by the productivity of labor in B. 

With wages thus determined, it is clear that no employer, with- 
out governmental aid, can afford to hire labor to exploit the oppor- 
tunities represented by C and D. This would necessitate paying 
labor in C and D as miuch as it produces in B, and that by hypothe- 
sis is more than it produces in C and D. 

Now let us suppose that a political party is in power which holds 
the belief that we should produce everything that we consume, that 



THE TARIFF PROBLEM 191 

is, that the opportunities represented by C and D should be exploited 
as well as those represented by A and B. Labor may be 
drawn away from A and B. This involves the necessity of 
compensating' entrepreneurs in somie way for the disadvantages 
under which they will operate in C and D. Either wages must 
be reduced in A and B, ot some form of subsidy must be granted 
to C and D. 

The commodities that the industries composing C and D will 
produce have been hitherto, we assume, obtained from abroad 
through exchange for commodities produced by A and B. The gov- 
ernment now renders this difficult by placing high duties upon the 
former class of commodities. This means that producers in the 
groups A and B — both employers and workmen — must pay higher 
prices for what they buy. They do not receive higher prices for 
what they sell; in fact, they receive lower prices, as this, we have 
seen, is the effect of protective duties upon export industries. It ap- 
pears, then, that part of the disadvantage of producers in C and D 
is removed by reducing wages in A and B. 

After the duty has gone intoi effect and the prices of commodi- 
ties that can be produced by C and D have risen sufficiently, en- 
terprisers will be able to^ hire labor at the wage? prevailing in A 
and B, and establish industries in C and D. So' far as the remain- 
ing laborers in A and B buy the products of C and D, the differ- 
ence between the price which they pay for those products and the 
price that they woiild pay if they were permitted tO' import those 
products duty-free is a tax paid not to- the govermnent, but to the 
producers in C and D, to enable the latter tO' remain in business. 
It is an uncompensated deduction from the natural earnings of the 
laborers in A and B. Their wages have been reduced. Nor are 
the workers in C and D paid as much, estimated in purchasing 
power, as they would have received if they had been allowed to 
remain in A and B under the earlier conditions. The net effect 
of the imposition of the duty has been to saddle the self-supporting 
industries, A and B, with the support of the pauper industries, C 
and D. Yet the inventors of this policy have the effrontery to 
tell laborers in A and B that this policy is the bulwark of their 
high rate of wages ! 

The principles involved in the illustration may be stated in the 
following general terms: Wages in any country will be at the high- 
est point when all the labor of that country is concentrated in the 
industries in which its relative advantages over other countries 
are greatest. If there are nO' protective duties whatsoever, em- 
ployers will, as a rule, seek out the industries in which their country 



192 RB A DINGS IN ECONOMIC PROBLEMS 

has the greatest relative advantages. Protective duties enable 
other industries to exist, but only through taxing the more pro- 
ductive industries for their support. Protection as a permanent 
policy means a slight reduction O'f money wages, and a greater 
reduction in wages estimated in purchasing power. 



H. CURRENT ARGUMENTS FOR FREER TRADE. 
no. Free-Trade and International Peace. 

BY RT. HON. WINSTON S. CHURCHILU 

And, after all, when we come to ask, "What is the bearing of 
Free Trade upon international relations?" I say that question is 
very easily answered. It is answered in one word. The bearing of 
Free Trade upon international relations is "Peace." The funda- 
mental idea of Protection is exclusion and isolation. The funda- 
mental idea of Free Trade is unity and interdependence. The 
arrangement of Europe or of the Great Powers of the world, which 
our Protectionist friends appear to contemplate, is that there should 
be a numlber of ver}' powerful self-contained States, producing with- 
in the circle of their frontiers everything which is necessary for 
peaceful industry or warlike preparation, independent of their neigh- 
bours, requiring from their neighbours no services, or scarcely any 
services, rendering them but few in return, and able to break off 
all relations, whether commercial or diplomatic, at any momient with 
the minimum of inconvenience. The European arrangement to which 
the Free Trader looks forward is a co-operative commonwealth, a 
great banding together of all the peoples of Europe, of Christendom, 
and ultimately of the world, so that their affairs and interests may 
become inextricably interwoven, so that they cannot tear them 
apart even if they would, so that every one of them is dependent 
upon every other member of the vast confederation. 

Which of those twO' ideas is winning at the present time? 
Is it the isolation of nations, or is it their union and their inter- 
course? Why, with every year that passes over the globe, with 
every improvement in communication, with every decision of a 
Hague Tribunal, with every meeting of a Peace Conference or 
an International Congress of any sort or of any kind, the unity 
of the civilized world, and the interrelation and interdependence of 
all civilized modern communities, is being steadily and irresistibly 
advanced. Yes, in spite of the folly of armaments and tariffs, in 
spite of the unwisdom of so many of our political and journalistic 



THB TARIFF PROBLEM 



193 



hot-heads, the unity and solidarity of the civiHzed world grows 
stronger from year to year, and almost from month to month. 
"All the men," as Diderot said, "in all the lands have become neces- 
sary to one another." And this process of consolidation and amal- 
gamation which is going irresistibly forward, which is in the 
center of the whole movement of the modern world, is taking place, 
let it be observed, without the slightest loss of national traditions, 
of love of national characteristics, of the culture and development 
of each community in itself and for itself. On the contrary, as 
mankind has becoame more united and more civilized, you find that 
study of the past, that introspective examination by each race 
of its own past, of its own history, of its own innate characteristics, 
which everywhere is producing a great and innocent growth, a 
harmless growth, of peaceful nationalism within the larger inter- 
nationalism of the world. 

What is it that preserves the peace of Europe at the present time ? 
Ministers can do something. Kings and Presidents can do much. 
But, in spite of all the efforts which are being made, and which 
are growing from year to year, of individuals and of sections of 
society in this country and in that, I should not feel the assurance 
which I do of the peaceful developmient of European politics in 
the next twenty years, were it not for the blessed intercourse of 
trade and commerce, in combining the nations together against 
their wills, in spite of their wills very often, unconsciously, irre- 
sistibly, and unceasingly weaving them together in one solid in- 
terdependent mass. During nearl}' forty years no two great, highly 
organized commercial Powers have drawn the sword upon one an- 
other. Crises there have been, and quarrels and disputes of all 
sorts and kinds, grave headlines in the newspapers, long faces 
pulled by wiseacres, gnashing of teeth by fierce military and journal- 
istic men, but something always happens at the critical moment to 
smooth away the difficulty before it breaks into actual rupture. 
And what is that something? It is the prosaic bond of commerce 
in which all civilized and commercial States are becoming involved. 
And sure I am of this, that the certain impoverishment of everyone, 
the crash of exchanges all over the world, the wide-spread ruin 
which would go through neutral lands, the arrest of industry^ and 
trade, the collapse of credit upon which modern communities de- 
pend — all these tremendous facts, placed as they are before the 
eyes of everyone from his own daily experience, do impose an 
effective caution and restraint, even upon the most reckless and the 
most intemperate of statesmen. 

And we find that the great force of capital, the great subtle, 



194 READINGS IN ECONOMIC PROBLEMS 

omnipresent inflnence of capital, is engaged and interested through 
every channel, during every crisis, in averting the opening of hos- 
tilities. Well, if capital is enlisted on the side of internationalism,, 
what of labor? Is there not a similar miovement towards unity 
on the part of the workers all over the world? Is there not a 
great assertion on their part that the toilers of the world are all 
members of one great family, are all the bearers of one heavy 
burden, and that they will not alloAV the sensational combinations 
of individuals interested in projects of government or diplomacy 
to precipitate great masses of human beings at each other's throats 
in fratricidal strife? 

III. A Socialist's Plea for Free-Trade, 

BY EDWARD BERNSTEIN. 

A network of industrial, commercial, scientific, artistic, literary 
and other social ties and associations, covers the civilized world. 
Means of communication, which lead the nations to a closer inter- 
course, are continually being improved. People are proud of this, 
and in glowing terms praise each new achievement of the kind. 
But at the same time we see civilized nations build up tariff walls 
in face of all this, and from time to time these are increased one 
after the other in order to counteract as much as possible the con- 
stantly increasing facilities of international commimication. 

No' doubt, as long as society is divided into . monopolizing cap- 
italistic and working classes respectively, who have to compete for 
their livelihood, no technical progress of any kind will be an unmixed 
blessing, and free exchange will have its drawbacks for many mem- 
bers or sections of the comimunity. But the remedy lies not in the 
return to the erection of tariff walls and toll gates. These will 
only impede progress and deflect the eyes Oif people fro^m measures 
of real progressive reformi. They tend tO' enrich some sections of 
the community at the expense of others. They represent a move- 
ment which knows nO' limits, each Protectionist nation trying to 
outrival the others in higher and more elaborate tariffs. And last, 
but not least, they are one of the main factors of rivalry and en- 
mity between the nations. Based on the idea that the industrial 
progress of one nation is detrimental to the welfare of the other, 
or at any rate fostering this notion, they create international dis- 
trust, and are greatly responsible for the formidable increase of 
armaments which we witness in these days of much vaunted civil- 
ization, and more particularly in the case of those nations who 
pride themselves on their civilization. Most of the cjuestions which 



THE TARIFF PROBLEM 195 

separate these nations and make a continvioiis increase of arma- 
ments appear an inevitable necessity are directly or indirectly con- 
nected with the question of commercial policy. This uninter- 
rupted increase of armaments, which presses with growing severity 
upon the wealth of the nations, everywhere draining the revenues 
and depriving us of the means for thoroughgoing reforms, is a 
blot on humanity, and makes it the slave instead of the master of 
its destinies. But this will never be stopped or effectually reduced 
unless the nations return from the polic}^ of tariff walls to^ that of 
free intercourse. Tariff walls make colonial questions and the 
questions of our relations to semi-barbarous countries and subject 
peoples much more complicated than they would be of their own 
nature. The}^ hamper and even prevent peaceful solutions and in- 
crease the incitement to^ wars and Avarlike dispositions. 

A small minority only is really benefitted by this state of affairs. 
The great majority of people are damaged by it. If at a former 
period it was a debatable question whether the wage-earning classes 
are vitally interested in free international exchange, in my opinion 
this time has ceased to exist. Under present conditions free inter- 
national exchange is, I hold, before all, a working-class question ; 
and all impediments to this exchange artificially create new inter- 
ests against thoroughgoing industrial reforms. 

112. Freer Trade and Industrial Efficiency. 

BY WILUAM C. REDFIELP. 

In the Republican platform of 1908 appeared the following 
words: "In all tariff legislation the true principle of protection is 
best maintained by the imposition of such duties as will equal the 
difference between the cost of production at home and abroad, to- 
gether with a reasonable profit to American industries." 

It is a great pity that those words were printed only in the 
English language. It is a pity that they were not translated into 
Japanese, that they might adorn the cabs of the 720 American loco- 
motives in Japan ; and into Chinese, that those in Manchuria who 
wear American cottons might know how self-sacrificing the makers 
were in selling them to them. It is a pity that they were not trans- 
lated into Hindu, that the stokers of the Calcutta electric-light works 
might know how generous was the American firm that sold them 
their apparatus. 

But since the difference in the cost of production is said to be 
such that we need protection against the manufacturers abroad, let 
us look more closely at those words. Speaking from a manufac- 



196 READINGS IN ECONOMIC PROBLEMS 

turer's standpoint, I venture to think it can be shown that this 
statement of the Republican platform has these definite character- 
istics, i) It involves certain contradictions, well known to manu- 
facturers, which destroy its force. 2) It assumes the existence 
oi facts which dO' not exist. 3) It may involve such discrimi- 
nation against some American manufacturers and in favor of some 
foreign manufacturers as is certainly unjust. 4) It ignores the 
nature of cost and the nature of competition, and, taken on its face, 
calls for the removal of the duties on many American manufac- 
tures. 5) It has worked grave injustice to- our poor people and 
disaster to many American manufacturers. 

These things I believe at the end of twenty-five years' manu- 
facturing experience. I have found it possible, and we all know 
hundreds of American manufacturers have found it possible to 
compete in the markets of the world. How does it happen that in 
a quotation recently made for machinery to a mine in Japan the 
American price was $215 less than the English price. Last year I 
was in the city of Tokyo, and a friend who was with me took a 
large contract from the Japanese Imiperial State Railways, in open 
competition with Germany and England for several million dollars' 
worth of locomotives. That gentleman, at the locomotive shops of 
the Imperial Railways, was told, "We can make locomotives much 
cheaper than you can in America." "Can you?" inquired my friend, 
"If so, let us get at the facts. What makes you think your loco- 
motives cost less than ours?" "Why," the Japanese replied, "be- 
cause we pay only one-fifth the wages to^ our men that you pay to 
yours." So they got the cost books, and discovered that "the labor 
cost for locomotives on the same specifications was three and one- 
half times greater in the Japanese than in the American shop. That 
is a perfectly normal fact. 

Another illustration may be interesting. My agent in the city 
of Calcutta one day called my attention to the shoes he was wear- 
ing. He said, "I paid $3.85 for those shoes." "Why," I said, "that 
is an American shoe." "Yes," he said, "I bought it here. It is the 
regular American $5 shoe." 

I treasure as a souvenir a small, ordinary pencil. It has upon it 
the name of the American Lead Pencil Co. I bought it out of 
stock in the small town of Bandoeng, in central Java. I have in 
my home some men's toilet articles — shaving soap, etc., made in 
New Jersey. I bought them in Hongkong. 

Yet we are told that though foreign manufacturers are handi- 
capped by distance, time, and freight, we can not compete with 
them at home because we pay high wages. To end these illustra- 



THE TARIFF PROBLEM 



197 



tions, let me give a list taken at ranidom from one export journal 
of American goods offered abroad for sale in open competition 
with Germany and Great Britain: "Ironmongery, fine tools, bicycles, 
sporting goods, lamps, razors, firearms, carriage makers' supplies, 
sanitary goods, lighting systems, dry goods, men's furnishings, 
boots and shoes, corsets, hats and caps, textiles, clothing, women's 
furnishings, office furniture, office devices, stationery, typewriters, 
filing cabinets, printers' supplies, paper, machine tools, boilers, 
lubricants, electrical material, valves, wood- working machinery, 
belting, shafting, pulleys, packing, furniture, kitchenware, and agri- 
cultural implemients." There are manufacturing houses in America 
that sell almost no^ goods in the United States. They pay as high 
wages as an3^one. 

It is often assumed that American manufacturers cannot com- 
pete in the world's market on even terms without protection, and 
can not even hold their own at home. The only wa}^ suggested of 
meeting competition is by reducing wages, the crudest, the coarsest, 
and the most brutal of all methods. 

To get at the heart of the question, let us look at the cost of 
production from the manufacturer's stanpoint. There are four 
grO'Ups that enter into every factor}^ cost: i) the co^st of labor; 
2) the cost of material; 3) overhead charges; and 4) selling cost. 
The aggregate of these four fixes the point per unit where profits 
begin. Let us discuss them separately : 

First, labor cost. In a modern industry this is often not the 
largest element in cost per unit of product. It is a matter of testi- 
mony that in an American locomotive the percentage of direct labor 
cost is eighteen and that of material and overhead charges eighty- 
two. The important factor in labor cost is not the rate of wage, 
but the rate of output. It is not what you pay but what you get 
from what you pay that counts. 

Once in Paris I employed a lot of French carpenters and paid 
them each $1.90 a day, and at the end of four days I was well-nigh 
crazy. Accidentally I found a man who looked like an American 
carpenter. "Are you a Yankee?'' I said. "I want to. employ you 
at once." He said, "Boss, I charge $4.50 a day." I said, "Come 
right along." Two days later I discharged four Frenchmen, for my 
one American carpenter did more than four Frenchmen. There are 
sound reasons for this. A French workman goes to work having 
eaten almost nothing. For breakfast he has a biit of bread and 
coffee. At eleven o'clock he eats a little bread and drinks a little 
sour wine. At three he does the same. At night he has what he 



198 READINGS IN ECONOMIC PROBLEMS 

calls a dinner. Such a man cannot work: at any labor requiring 
steady physical exertion in competition with a man who eats three 
square meals a day. 

Cost is everywhere and always variable — at every tim^e and in 
every place. Output varies with the character of the workman, the 
equipment, the arrangement, with the nature of the superintendence, 
with the discipiline. It is absurd to assume that work done by a 
man paid $4 daily costs more per unit than work done by a man 
paid $2. It may be more or less costly. , Therefore, because cer- 
tain goods are produced at a certain labor cost per unit when the 
wage rate is $3 per day in a certain place, it can never be argued that 
the same wage rate on similar goods results in like labor cost per 
unit in another place. It inay vary ten to fifty per cent. To discuss the 
wage-rate as the controlling factor in labor cost per unit is both 
inadequate and misleading. To say that a man gets $3 per day 
means nothing at all as to the cost of his product. It may be either 
high or low. 

Apart from the wage rate, labor cost per unit is very largely 
under the control of the manufacturer and miay be radically altered 
without changing the wage rate at all. I know a factory in which 
the product was doubled in two years without adding a man or 
without adding a machine. This is how it came about. The men 
had been paid on day work. The head oi the concern changed to 
a piece work plan, guaranteeing the day wage as a minimum, and 
further guaranteeing that the piece work rate should not be cut. 
The first result was largely to increase the product. Then three 
other things happened. The manufacturer went to a man and said, 
"Pat, yon are earning pretty good wages. The more you earn the 
better for us both. But there is" one thing you cannot afford, and 
that is to have your machine shut down for repairs. It hurts me 
and hurts you every hour that machine is idle." The result was 
that the fifteen minutes which the employees were induced tO' spend 
in overhauling the machine each day saved many thousands a year 
for the factory. In the next place more scientific firing saved one- 
eighth of the operating time of that part of the plant, besides an 
immense saving in fuel. In the third place several thousands a 
year was saved on preventing the output of bad goods. In these 
ways the output of the factory was doubled in two years and 
the same thing is possible everywhere. 

Labor cost per unit varies with time and place, and in the same 
shop is constantly changing. It is affected by sanitary and climatic 
conditions. It is enormously modified by the progress of inven- 



THE TARIFF PROBLEM 199 

tions. The labor cost in July mia}^ be entirely altered in December. 
It varies with the arrangement of the machinery within the shop, 
is affected by the space available. It varies with the sufficiency 
and regularity of the supply of material and its suitability to the 
work. It is affected by the lighting and the power equipment of a 
shop and will change with a change in superintendents. It is af- 
fected by the methods of paying. And I write froim an experience 
in figuring labor costs to hundredths of a cent per unit. Labor cost 
is, therefore, a variable element. It can not be measured by any 
fixed standard. To offer a fixed rate of duty to cover the differ- 
ences in labor cost is to state an absurdity, for the one is variable 
and the other is fixed. In like manner it can be shown that costs of 
material, overhead charges, a.nd selling charges are variable. 

In fact, given the scientific spirit in management, constant and 
careful study of operations and details of costs, modern buildings 
and equipment, proper arrangement of plant and proper material, 
ample power, space and light, a high wage rate means inevitably 
a low labor cost per unit of product and a minimum of labor cost. 
A steadily decreasing labor cost per unit is not inconsistent with, but 
is normal to, a coincident advance in the rate of pay when accom- 
panied by careful study of methods and equipment. Conversely 
low-priced labor nearly always is costly per unit produced, and 
usually is inconsistent with good tools, equipment and large and 
fine product. From the above it is affirmed, without fear of suc- 
cessful contradiction, that American production today is often 
as cheap or cheaper in the labor cost per unit than foreign, and, 
so far from needing protection, it needs to be set free, that we may 
conquer the world. 

I believe that protection is an injury to American manufac- 
turers by limiting their scope and by narrowing their horizon. I 
believe it costs them enormously in the loss in foreign business, and 
that is one reason why manufacturers in this country are sO' rapidly 
ceasing to be protectionists. Another reason for their change of 
faith is that their plants have become so large that only in rare years 
has the demand in this country become enough to take their total 
product, and they have had to sell abroad. And so long as they must 
pay the high price for materials they find it somewhat difficult toi sell 
abroad, although they succeed at it. An overstocked domestic 
market is often no theory but a real condition. Take away the 
shackles that bind the manufacturer and he will be free to sell in 
the world's markets, without touching his pay roll. 

Protection, however, causes a manufacturer almost inevitably 
to depend on the Government for help, instead of carefully and 



200 READINGS IN ECONOMIC PROBLEMS 

minutely studying the details of his own business. Protection, more- 
over, has enabled many American manufacturers to prosper by sell- 
ing to their fello'W countrymen at prices so high that they have 
not thought it necessary to study their own businesses closely, be- 
cause they depend upon Government backing. 



I. SCIENTIFIC REVISION OE THE TARIFF. 
113. Economic Investigation the Basis for Tariff Legislation. 

BY HENRY C. EMERY. 

It is easy to point out the difficulties in determining the cost of 
production, the great variations in the cost of production at differ- 
ent times and in different places in the same country, and the 
absurdity of applying this principle with absolutely rigid logic. But 
any principle of actual commercial legislation must be somewhat 
rough and ready and is never intended by practical men to= be carried 
to absolutely logical conclusions. It can, of course, be pointed out 
that in strict logic such a principle as that just mentioned would 
require the enactment of a different tariff on goods imiported from 
different countries, according to the variations in cost of produc- 
tion in those countries. 

This, however, can be easily met by the application O'f a little 
common sense and the recognition that the real question is to .adjust 
rates in such a way as tO' meet the co-mpetition of the chief com- 
peting country. If there are several countries whose products com- 
pete actively, the true protectionists wo^uld demand that rates should 
be adjusted to meet the competition of that country in which the 
cost of production was the lowest. 

It can, of course, be pointed out, furthermore, that the logical 
application of this principle would require enormous duties on 
articles, like coffee and rubber, which are not produced in this 
country at all. But here, again, it is not a question of strict logic, 
but of practical common sense. Not even the most extreme pro^ 
tectionist ever dreamed of applying the principle to articles of this 
kind. 

I am convinced, however, that it is possible in the case of most 
staple articles of manufacture, to^ determine the ratio of the costs 
between two different counitries with sufficient accuracy for prac- 
tical legislation. There is, of course, no single cost of production 
of any article for a given country, but there is a fairly definite dif- 
ference in the money costs of a given specified article between two 



THE TARIFF PROBLEM 201 

different countries ; and this ratio can in many cases be sufficiently 
well determined to make such information of great value. 

As to the question of g'etting this informiation, the prohlem has 
proved easier, so far as domestic manufactures are concerned, than 
was expected, and has not proved insuperable in the case of foreign 
manufactures. Although in most eases it is impossible tO' get for- 
eign information as complete and detailed as that which can be se- 
cured for the industry in this country, we are convinced that enough 
information can be secured for an adequate basis of judgment. In 
any case, even if foreign costs could not be secured, the determina- 
tion of the cost of production at home would still be an important 
part oif a tariff inquiry. The real question is not so much what 
is the actual mill cost in a competing country, but at what prices 
and under what conditions could goods be laid down in the Amer- 
ican market to compete with the hoime product in the absence of 
any customs duty. These facts can be detenuined with sufficient 
accuracy for legislative purposes. 

Of course, many of you will say that all the foregoing implies 
the maintenance of the protective principle, and that since you 
do not believe in the protective principle you can see no utility 
in investigations of this kind. There are two answers to this. In 
the first place, it seems to mie absurd tO' protest against a better 
method of accomplishing a given result, simply because you do 
not believe in the result itself. If the free trader can get his policy 
adopted and put into actual practice by the people, well and good. 
But if, as a matter of actual politics, the people prefer a protective 
tariff, even the free trader ought to welcome an effort to^ have such 
a tariff, of which he disapproves in principle, levied as honestly and 
fairly as possible. To- do otherwise, would be to put one's self in the 
position of a man whO' could oppose regulations protecting the safety 
of passengers in ocean travel, or the welfare of seamen engaged 
in such occupation, on the ground that he did not believe in people 
going abroad, and therefore did not believe in making travel as 
safe as possible. 

The second answer is that a tariff with nO' protection features 
has never been seriously considered by any political party in this 
country. One great party does, on the whole, believe in a revenue 
tariff and is working toward that end, meaning by this only that 
duties shall be levied primarily for revenue purposes rather than 
for protective purposes. However, this program involves the 
placing of import duties on a large variety of articles which are 
produced at home and which consequently bear incidental pro- 
tection. 



202 READINGS IN ECONOMIC PROBLEMS 

Therefore, a study of relative industrial conditions becomes as 
important for the person wlw believes in a revenue tariff as it does 
for the protectionist. If the first place, it may be assumed that a 
Congress wishing tO' adjust duties in this way, while aiming solely 
to secure revenue, would prefer to get the needed revenue with 
the least disturbance possible to business. Furthermore, they wish 
to raise the largest amount of revenue with the least burden pos- 
sible on the consumer. This, again, can be determined only after 
a very careful study of relative industrial conditions. 

Even more important, however, from the point of view of the 
revenue principle, is the fact that, where it is intended to raise 
revenue by imposing duties on a large number of articles rather than 
on a few non-competing articles, it is impossible to make any ac- 
curate estimate of what the revenues will be, until a study has been 
made of relative prices and costs as a basis for determining how far 
imports would be increased or decreased by changes in duties. 

114. The Impossibility of Ascertaining Costs. 

BY H. PARKi:;R WILLIS. 

The case against the cost-of-production theor}^ as a regulator 
of tarifl" duties may be summed up in a series of propositions some- 
what as follows : 

1. In practice the ascertainment of costs is impossible. No 
board of commission has the power to demand cost statements 
from manufacturers, or producers; and if it had, it could not se- 
cure truthful statements. Moreover, there is no way of obtaining 
statements of any kind from foreigners. 

2. Even if all manufacturers both here and abroad were willing 
to throw open their books in an absolutely honest and impartial 
way to an all-powerful commission, it would be of little service. 
This is because cost accounting is not generally practiced by pro- 
ducers and because, where it is practiced, there is no general agree- 
ment as to the treatment of different elements of cost. 

3. If there were a perfect system of cost accounting installed 
upon a uniformi basis in every plant manufacturing a given article 
throughout the world, knowledge of comparative costs would still 
be of little service, since costs in every country would have to be 
known before any conclusions could be arrived at as to what tariff 
rate was needed to protect a given country against the competition 
of others. 

4. If all these facts were known for every country, the diffi- 
culty would be about as great as it was previously if the data were 



THE TARIFF PROBLEM ■ 203 

to be used for the establishment of tariff rates. This is because 
costs of productioni vary as widely within a given country as they 
do between different countries. Unless it were known whether a 
duty were to be imposed for the purpose of equalizing costs as 
between the best, the poorest, or the average establishments in the 
several countries, the information about costs would be useless as a 
basis of tariff duties. 

5. Even with knowledge on all of the points already enumer- 
ated, and with a clear-cut intention on the point indicated above, 
the cost analysis would still be inadequate because of the fact that 
many commodities are produced in groups, or as by-products O'f 
one another, so that to utilize the general cost analysis as a basis 
for tariff rates, it would be necessary to know the manufac- 
turer's intention with reference to the fixing of prices. It would 
further be necessary to know that the manufacturer had no dis- 
position to establish "export prices'' at rates lower than those that 
would be dictated by his costs of production. 

6. If all of the foregoing factors were known, including posi- 
tive data regarding the intention of the manufacturer in regard 
to the establishment of prices, there would still remain the ques- 
tion whether this information about costs, which is necessarily stated 
in terms of money, would have any real significance of a permanent 
economic character. Money costs do not correspond in all cases 
to real costs as measured by sacrifice oi labor and capital. It may be 
true that a given country can produce much more cheaply than 
another, yet it does not follow that it will so produce, since its cost 
advantage in some other line may be so much greater as to dictate 
its devoting its attention almost exclusively to that line. 

For all these reasons, the conclusion must be reached that cost 
of production is both practically impossible and theoretically un- 
sound as a basis for the establishment of tariff duties. 



V. 
THE CURRENCY PROBLEM. 

A. THE MONEY TRUST. 
115. Is there a Money Trust? 

BY GEORGE W. DOWRIE. 

During the recent presidential campaign the following utter- 
ance of Mr. Wilson attracted wide attention : "The greatest mon- 
opoly in the country is the money monopoly. So long as it exists 
our old variety of freedom and individual energy of development 
are out of the question. The industrial nation is controlled by its 
system of credit. This is the greatest question of all, and to this 
statesmen must address themselves with an earnest determination 
to serve the long future and the true liberties of men." 

It is the purpose of this article to present the most important 
facts bearing upon the question of the existence of such a "money 
monopoly," as Mr. Wilson has in mind, and, if such a monopoly is 
found to exist, tO' seek to determine the causes which are respons- 
ible for it and its relation tO' our national well-being. At the outset 
it must be clearly understood that by a "money monopol}^" or "money 
trust" is meant the concentration in the hands of a small group not 
only a large part of the three billions of actual money in the 
country but, as a natural consequence, the control of the many bil- 
lions in instruments of credit issued upon this relatively small 
amount of cash as a basis. 

This is an age of "big business" and it is but natural that banking, 
which is the business of businesses, should be carried on in a cor- 
respondingly large way. When a concern like the United States 
Steel Corporation with its billion dollars of capitalization and a daily 
cash balance of seventy-five millions comes into existence, not only 
investment banking must be carried on upon a hitherto- unheard of 
scale, but the accomplishment of the ordinary banking operations 
will demand greatly augmented facilities. The result has been that 
new banking institutions of gigantic size have been organized, or 
that some of the more powerful of the older banks have absorbed a 
number of their weaker competitors. 

In refutation of the contention that the banking facilities of the 
country have become concentrated, critics point to the fact that the 



THB CURRENCY PROBLBM 205 

number of banks in the United States has doubled within the short 
space of thirteen years, making a total of more than 25,000 insti- 
tutions with resources of twenty-five billions. But they neglect to 
state that four billions of this amount is now under the direct 
control of but 46 of the 25,000 banks. In our large cities there 
has been a steady decrease in the number of banks, New York alone 
having lost 103 of its banks within the past ten years, mostly be- 
cause of their being absorbed by other banks. Paradoxical as it 
may seem, this large decrease in the number of banks has brought 
with it a more than correspondingly large increase in the domination 
of New York in money matters until at present this one city with 
less than one per cent of the country's banking establishments has 
under its control one-fourth of our banking resources. 

We have not as yet, however, penetrated beneath the surface 
of our problem. A few years ago a bank with deposits of twenty- 
five millions was looked upon as a wonder of the age. Today 
there are six banks with deposits in excess of one hundred millions. 
These six banks alone have in their vaults one-tenth of the money 
in the United States and, what is of more importance, exercise an 
influence in finance far out of proportion toi their actual resources. 

But we have not yet reached the heart of the matter. A com- 
parison of the lists of directors of the leading banks and trust 
companies of New York, Chicago, and other large cities, reveals the 
fact that there is a perfect network of interlocking directorates, not 
only between the institutions of the same city, but between those 
of different cities. The leading banking firms of New York: J. P. 
Morgan & Co., The National City Bank, The First National Bank, 
and The Guaranty and Bankers' trust companies, both of which are 
controlled by the "big three" banks, not only have representatives 
on the boards of directors of numerous other banks, but each 
of the big three has representatives on the boards of the other two. 

We have still another step to go before we g'rasp the problem 
in its entirety. Investment banking was formerly one of the most 
unpretentious branches of the profession. The investment bankers 
bought bonds and stocks and sold them, toi private purchasers for 
a modest commission. With the formation of gigantic corporations 
with their security issues reckoned in termis of hundreds of millions 
investment banking suddenly assumed a prodigious importance. 
Instead of waiting for a concern to^ be organized, and its securities 
placed upon the market, the investment banker undertook its organ- 
ization, formed a syndicate to purchase all its securities, and placed 
himself or his representatives upon the board of directors. But this 
was not enough. Realizing that life insurance companies, banks, 



2o6 READINGS IN ECONOMIC PROBLEMS 

and trust companies are the heaviest purchasers of bonds and 
stocks, they began to obtain control of these institutions in order 
to have a sure and eas)^ sale for their securities. In this way they 
controlled not onl}^ the purchase of their wares but the sale as well. 

So profitable did .this branch oi banking become that the great 
commercial banks entered the field, but not to compete. As the 
Pujo committee report puts it, "The possibility of competition be- 
tween these banl<ing houses in the purchase of securities is further 
removed by the understanding between them and others that one 
will not seek by ofTering better temis to take away from another a 
customer which it has hitherto served. This is a principle of bank- 
ing ethics." 

This is the explanation of the presence of representatives of 
the big three banks and their two satellite trust companies upon 
boards of 112 of the largest corporations in the country, including 
railroads, public utilities, steamships, telephone and telegraph com- 
panies, etc., and representing a total capitalization of twenty-two 
and a quarter billions. It is also an explanation of the presence oi 
representatives of these same banks upon the directorates of the 
insurance companies and other institutions which purchase large 
amounts of securities. In few cases do the representatives of the 
banks hold any considerable portion of the stock of a corporation, 
but their control of the purse strings, as well as their sound judg- 
ment and wise counsel in financial matters, is bound to give to them 
a predominant influence. 

In view of the fact that the dozen men who' hold in their hands 
this vast and dangerous power have been subjected to all manner of 
abuse by the press and upon the lecture platform, it is only fair to 
them tO' say that they have, on the whole, used this power with 
moderation and judgment. They are to a large extent innocent 
oi deliberate attempt to control our well being by way of a corner 
on our media of exchange. Most of them admit that their power 
is too great and express a willingness to- further any reasonable 
measure that will diffuse their responsibility. 

The concentration of our credit facilities is like the growth of 
any "big business" in that it is largely the result of a process of 
evolution. However, in the case of the so-called money trust, the 
concentration was abetted by a defective currency and banking sys- 
tem which has brought about the accumulation of enormous re- 
serves in the hands of a few persons and given to- these persons 
responsibilities and power which in any other nation are exercised 
only by an institution under close governmental supervision. It is 
this situation among others which mal<es the enactment of a cur- 



THE CURRENCY PROBLEM 207 

rency reform measure not only desirable but highly necessar}'. "It 
would, of course, be absurd," says the report on the money trust 
investigation, "to suggest that the control of the bulk of the widely 
distributed wealth of a great nation can be controlled by any set of 
men." But on such evidence as we have examined we are compelled 
to argue with the report when it adds that there exists so close an 
identity of interest between a handful of financiers that they have 
obtained a powerful grip upon the extension of credit facilities to 
our national industries and are in position to play havoc with our 
whole financial system. 

Severe panics of recent years, especially the panic of 1907, have 
revealed still another dangerous concentration of power in the hands 
of a few individuals, viz., the committee in control of the Xew York 
Clearing House. So limited is the size of the membership of the 
Xew York Clearing House and so rigid the examination of entrants 
that but relatively few of the banks are members. Furthermore, the 
privilege of clearing through members, which was formerly freely 
granted to non-members, has been so hedged about with restrictions 
and so subjected to the will of the clearing house committee that 
the continued existence of any individual bank is too largely sub- 
ject to the will of the committee. Although each bank, whether 
large or small, has an equal voice in the selection of the committee, 
there is no question but that the same banks which we have found 
dominating the money market exercise a large influence in the 
afifairs of the clearing house. 

The panic of 1907, as well as earlier financial convulsions, caused 
the clearing house to do what our banking laws should never have 
left to the will of a group of individuals, viz., issue emergency 
currency to relieve a situation in which even," one at the same time 
is demanding the limited supply of cash in the countr\-. Emergency 
currency should be issued by an impartial body upon relatively easy 
terms and recalled when the need for it has passed. On the contran,', 
the clearing house loan certificates were issued only to members of 
the clearing house upon hard terms and were frequently called in so 
hastily and arbitrarily that sound but temporarily embarrassed in- 
stitutions were driven to the wall. As Air. Hepburn puts it. "The 
issue of clearing house certificates is a calamity. They do not 
occur anywhere else and should not here. They hurt the credit of 
the whole countr}-,"' for, it may be added, their issue is in reality 
a suspension of specie payments. The clearing house is a most 
important part of our financial system and its usefulness should not 
be impaired in the least degree, but it should be placed under 



2o8 READINGS IN ECONOMIC PROBLEMS 

strict goivernmental supervision. Moreover, the banking and cur- 
rency law's should be so amended as to provide properly supervised 
agencies for the issue of additional paper money whenever it is 
needed and thus not only will there be no further excuse for the 
usurpation O'f this power by an uncontrolled group of individuals, 
but the development O'f the conditions which precipitate financial 
panics will be automatically checked. 



B. SUSCEPTIBILITY OF MODERN INDUSTRIALISM 
TO DISTURBANCE. 

ii6. Business Organization and the Industrial Equilibrium. 

BY EDW^\RD D. JONES. 

The nineteenth century economy is not the same as that which 
preceded it. Changes have taken place which have resulted in 
making industry sensitive to destructive influences once unknown. 
Such changes are the division of labor and the application of cap- 
ital to industry, which increase the interdependence of industrial 
units. These also, by lengthening the chain of connected produc- 
tive processes, lengthen the time during which disturbing changes 
may occur. Both the solidarity and the sensitiveness of business 
conditions are increased by the use of credit. 

The course of foreign commerce is usually recognized as less 
stable and reliable than that of home trade. Hence, the growth of 
international commerce opens the trade of a country to many new 
disturbing influences. Agriculture and the other extractive in- 
dustries are less susceptible to injury than are manufacture and 
commerce, because the goods which they produce are in the least 
possible degree specialized, and therefore sealed for specific com- 
mercial uses. These industries are adaptive, since, if one outlet 
is closed, the goods may be fitted for another use. Each branch 
of manufacture must follow the course of some specific demand 
and commerce must suffer by any readjustment of supply and de- 
mand areas. The bonds of credit linking these various parts of a 
country's industries together by credit and debtor relations put the 
whole economic organism in a position to suffer from the reverses 
which come tO' the least stable elements composing it. Whatever 
in any way extends the market, therefore, or complicates business, 
if it is accompanied by a corresponding increase in economic soli- 
darity, makes larger the area within which crisis-producing may 
appear. 



THB CURRENCY PROBLEM 



209 



The delicately poised industry, which is in these days built up 
through ■ the instrumentality of credit, may suffer derangement 
through the failure of a staple crop, through the collapse of a 
mining excitement, or in the puncture of the bubble of over-cap- 
italization of joint stock concerns. The whole industry of a country 
may suffer in a derangement having its origin and cause in some 
one trade. It has even been maintained that in certain critical 
seasons a general convulsion has followed as the result of the dis- 
astrous collapse of some one great individual concern. 

Inquiry as to the character of the machinery which controls 
the larger movements of industry reveals one of the serious 
weaknesses of the present economic order. While the organization 
and control of the internal affairs of business units have been well 
looked after, there have been developed as yet few efficient means 
of facilitating the co-ordination of the activities of the various 
economic units according to a general and sufficient plan. There 
is a lack of means for supplying information as to the general 
present and future conditions of the market, and for subordinating 
individual producers to the dictates of a comprehensive and rational 
policy. 

The changes which took place during the Industrial Revolution 
were primarily changes in the technical processes of manufacture. 
The proportion of capital employed has been increased. The di- 
vision of labor has been greatly furthered, and this has necessitated 
the gathering of workmen into great comimunities where all depend 
upon the turning of the same chance of the markets. This concen- 
tration of productive forces means an extension of the market. The 
evolution which has drawn men together as producers has separated 
producers from their markets both by distance, time, and general 
social and economic relations. Under these conditions when an 
industry is depressed it means a concentration of suffering in a 
few localities. The difficulty of bringing together a body of expert 
workmen and the difficulty of providing for them if discharged 
en masse are circumstances leading employers to continue oper- 
ations when the conditions of the market are unfavorable. Large 
capital also calls for continuous use regardless of the fluctuations of 
demand. 

The length of the productive process has been increased, if not 
in time, at least as regards the number of hands to which the vari- 
ous parts are intrusted. A cause of misunderstanding is thus intro- 
duced. The division of functions is so great that even makers of 
complimentary goods and* parts of composite .products lose sight 
of one another. As the sphere of the operations of each unit is 



2 lo READINGS IN ECONOMIC PROBLEMS 

narrowed the difficulty of keeping informed as to the whole process 
and of regulating one's activities accordingly is increased. 

Changes in demand of no' less momentous character have taken 
place. It is true that the market open to any single producer is 
now geographically much wider than ever before, but every part 
of this field is now! operated upon by causes tending to produce un- 
certainty such as the producer for a local market formerly never 
experienced. The character of our culture, which has emphasized 
freedom and individuality, has made the economic conduct of the 
buyer difficult to predict. Custoan, formerly marked clearly defined 
limits within which prediction was possible. As customs have lost 
their force, these scanty rules have slipped from the hands of an 
anxious trade to be replaced by no equally adequate means of read- 
ing the markets. 

The growth O'f means of communication, and the removal of 
barriers to trade, stimulate a rapid change of ideas and economic 
wants. The growth of city life increases the variability of con- 
sumption, for. changes in the taste of city people are rapid, and the 
power of choosing substitutes in consumption is greatest in cities. 
One concomitant of a quickened social intercourse is the growth of 
the power of fashion. A more rapid change of fashions takes place 
as the competition for social pire-eminence is increased. 

The localization of industry requires an extensive machinery to 
spread products evenly over the area of consumption. Between 
the producer and the consumer an immense amount of complicated 
machinery has been erected so that it is difficult, if not impoissible, 
for them to trace each other's movements. The relation between the 
two has become an impersonal one hard tO' forecast before the 
actual cash nexus is formed. The growth of means of transpor- 
tation has accustomed the producer to- look to a distance for his 
market, and the consumer to' hold in equal esteem supplies coming 
from any quarter or any distance. Modern credit and facilities of 
exchange permit the most lively interchange of influences between 
all parts of the economic field. Upon so large a field nO' producer 
can single-handed compass the problem of understanding the 
market. The number of the competitors is unknown, and so is their 
producing power. The changes of the market are more or less of 
a riddle. Calculations based upon the conditions at home miay be 
upset by a failure of Russian harvests, by a revolution in South 
America or legislative changes in Europe, by an invention or trust 
in the United States or a subsidized industry in Canada. 

The result is that the problem of determining the nature and 
extent of demand is an extremely difficult one for the individual 



THE CURRENCY PROBLEM 2ii 

producer even when equipped with long experience and the best 
available means of information. Capital and the division of labor 
which have accomplished so much in increasing production have 
not been sufficiently applied to the solution of the problem oi the 
market. In short, the machinery of management has not developed 
pari passu with the technique of production. 

In spite O'f the splendor of isolated achievements in the con- 
struction of great business, there is some ground for saying that 
the lack of a well co-ordinated system of control makes industry 
resemble, at present, a mob rather than an army. Indeed, the head- 
long passion of the mob in which each stimulates the other, and 
where for lack of a plan things are overdone, resembles somewhat 
the stress of competition which when unrestrained ends in overpro- 
duction. 

117. Extent of the Use of Credit Instruments in Business, 

BY DAVID KINI^UY. 

We may summarize the results of our inquiry and inferences 
therefrom briefly as follows: 

In the first place, it is very clear that a large proportion of the 
business of the country, even the retail trade, is done by means of 
credit instruments ; 50 or 60 per cent of the retail trade of the 
country is settled in this way. Over 90 per cent of the wholesale 
trade of the country is done with checks and other credit docu- 
ments. The use of checks is promoted in a mieasure by the payment 
of wages by check. It appears from our investigation that of weekly 
pay rolls reported by the banks, aggregating $134,800,000 for the 
week ending March 13 last, 70 per cent v/as in checks. The great 
use of checks is shown also by the large number of accounts under 
$500. We may therefore safely accept an average of 80 to 85 per 
cent as the probable percentage of business of this country done by 
check. 

The fact that so large a proportion of business is done with 
credit paper may or may not be a good thing. Whether it is or not 
depends on circumstances. If any part of the country is compelled 
to use checks because of the lack of currency, when it would prefer 
the latter, the situation is an evil. The transaction of so large a 
volume of our business by checks is an element of danger in times 
of stringency and crisis. In such times the uncanceled balance of 
credit transactions creates a larger demand for money, but the habit 
of settling by check has meantime kept the available amount of 
money at a minimum. 



212 



READINGS IN ECONOMIC PROBLEMS 



The volume of credit transactions very likely tends to increase 
as popuilation and business grow. It does not increase uniformly, 
however, but by periodic movements. That is to say, the rate of 
increase of credit transactions, as compared with the whole volume 
of business, grows, as it were, by jerks and at a decreasing rate. 

C. THE INDUSTRIAL CYCLE. 
1 1 8. The Periodicity of Fluctuations in Trade. 

BY S. J. CHAPMAN. 

Everybody knows that production does not flow along uninter- 
ruptedly. It has its ups and downs. Periods of brisk business are 
followed by periods of stagnation. Some unsteadiness in trade we 
should naturally be prepared to find, for there are vicissitudes in 
all human affairs; but certain peculiarities characterize the broad 
fluctuations of trade which one would not-expect and which call for 
explanation. These peculiarities we may designate "synchronism" 
and "periodicity." 

Good times in the different industries tend to synchronize, or 
come more or less simultaneously. And so do bad times. There are 
numerous exceptions, but the rule seems to be that most industries 
are every now and then depressed together, and every now and 
then flourishing together. Moreover synchronism appears tO' hold 
internationally. When commerce is sluggish in one country it tends 
to the sluggish also in other countries. 

The periodicity of fluctuations in trade means that the intervals 
between the fluctuations are not of quite uncertain duration. Regu- 
larity is far from being perfect, but it is sufficient to warrant the 
assertion that trade fluctuations exhibit a degree — a comparatively 
high degree — of periodicity. They are like the disturbed oscillations 
of a pendulum when a kitten is playing with it. It used to be claimed 
that the time normally occupied by a trade cycle was ten or eleven 
years. But departures from this duration are not uncommon ; and 
it has recently been suggested that the wave length of a trade cycle 
really inclines to be about twice or three times a period of approxi- 
mately three and a half years. Thus the cycle, it is said, may be 
expected to cover seven years at least and, should it exceed this 
length, to extend to about ten and a half years. But, unfortunately, 
the evidence which has been collected and sifted so' far is too scanty 
to justify an unhesitating generalization. Of commercial fluctu- 
ations prior to the nineteenth century we are comparatively ignorant, 
and it is not known how far the cyclical movement reaches back. 



THE CURRENCY PROBLEM 2 1 -i 

119. The Periodicity of Commercial Crises. 

BY J. S. N1CH0I.S0'N. 

Attention has often been called to the periodicity of crisis After 
the occurrence of a crisis, there is, in general, a period of depression 
with restricted confidence and want of enterprise. That the de- 
pression is real, in the sense of afl^ecting the producing and consum- 
ing powers of the people, is shown by various kinds of statistics 
There is, in general, a falling off in the employment of labor and 
an increase m pauperism; as regards capital, falling profits are 
shown by the income tax returns, and the contraction of enterprise 
IS evinced by the reduction in the flotation of companies; the slack- 
ening of trade is revealed by the statistics of exports and imports 
by the dimmution of the returns of the clearing-houses and railway 
receipts, and the yield to taxes on commodities shows directly the 
decrease m consuming power. A low rate of interest, an abundance 
of 'money," a fall in all the more speculative securities, especially 
compared with those of the first class, point to a contraction of en- 
terprise and a check to the expansion of industry. 
_ Gradually the period of depression gives place to a steady quiet 
improvement, which is shown by similar statistical evidence.' As a 
rule, also, there is a slight upward movement in the prices of com- 
modities, and of the securities with dividends dependent on trade 
An improved demand for "money" is shown by the gradual rise in 
the rate of discount and a corresponding fall in the price of first- 
class securities with fixed interest. The period of steady prosperity 
m Its turn, gives way to a period of inflation culminating in a crisis.' 
It IS hazardous to express an opinion on the causes of periodicity 
at a time when the periodicity itself seems questionable, but I ven- 
ture to suggest that the causes should be sought for rather in mental 
than in physical phenomena. The most striking features in the 
well-marked cycles up to 1866 were the contraction, expansion in- 
flation and final explosion of credit. The cycles Were especially 
credit cycles, and the effects on trade were apparently indirect No 
one now will question the importance of the organization of credit 
m production and consumption. But credit, although requiring for 
Its full development certain material appliances, is essentially mental 
Nothing, however, is more characteristic of mental phenomena than 
the oscillations between periods of depression, recovery and exal- 
tation. This is shown in an exaggerated fonn in nervous disorders 
It may well happen that the fear and distrust excited by a panic 
fade away m two or three years and give place to a sense of security 
which in turn engenders over-confidence, and finally speculative 



214 



READINGS IN ECONOMIC PROBLEMS 



mania. Of course some people will remain relatively cautious, and 
indeed the great mass of business may be conducted on sound prin- 
ciples, but it is sufficient toi account for the phenomena if any con- 
siderable section of the financial world goes through these emo- 
tional stages. The sympathy of markets is well known, both in in- 
flation and depression. The failure in recent years of the period- 
icity to assert itself in so marked a manner as before may be due to 
some great restraining influence, such as the continuous fall in 
prices, or the suppressed fear of the outbreak of a general war. 



D. GENERAL OVER-PRODUCTION. 
120. The Impossibility of Over-Production. 

BY JOHN STUART MILI.. 

Dearth, or scarcity, on the one hand, and over-supply, or, in 
mercantile language, glut, on the other, are incident to. all commodi- 
ties. Because this phenomena of over-supply may exrst in the case 
of any one commodity, many persons have thought that it may exist 
with regard to all commodities ; that there may be a general over- 
production of wealth ; and a consequent depressed condition of all 
classes of producers. 

The doctrine seems to me to involve so much inconsistency in 
its very conception that I feel considerable difficulty in giving any 
clear statement of it. In general the theory is that there may be an 
excess of productions in general beyond the demand for them ; that 
when this happens, purchasers cannot be found at prices which 
will repay the cost of production ; that there ensues a general de- 
pression of prices. The advocates of this theory maintain that 
the accumulation of capital may proceed too fast; and enjoin the 
rich to guard against this evil by an ample unproductive consump- 
tion. 

When writers speak of the supply of commodities outrunning 
the demand, it is not clear which of two elements of demand they 
have in view; the desire to possess, or the means to purchase. In 
this uncertainty it is necessary to^ examine both suppositions. 

First, let us suppose that the quantity of commodities produced 
is not greater than the community would be glad to consume. Is it 
possible, in that case, that there should be a deficiency of demand, 
for want of the means of payment? Those who' think so cannot 
have considered what it is which constitutes the means of payment 



THE CURRENCY PROBLEM 215 

for commodities. It is simply commodities. All sellers are in- 
evitably buyers. Could we suddenly double the productive powers 
of the country, we should double the supply of commodities in every 
market ; but we should also double the purchasing power. Everyone 
would bring to the market a double demand as well as supply. It is 
probable that there would be a superfluity of certain things. If so, 
the supply will adapt itself accordingly, and the values of things 
will continue to correspond to their cost of production. At any rate 
it is a sheer absurdity that all things should fall in' value, and that 
all producers should be insufficiently remunerated. If values re- 
main the same, what becomes of prices is immaterial, since the re- 
muneration of producers depends upon how much of consumable 
articles they obtain for their goods. 

But it may perhaps be supposed that it is not the ability to 
purchase, but the desire to possess, which falls short ; that those who 
have the means do not make the wants, and those who have the 
wants are without the means. A portion, therefore, of the com- 
modities produced may be unable to find a market. 

This form of the doctrine is more plausible and does not involve 
a contradiction. There may easily be a greater quantity of any 
commodity than is desired by those who have the means to pur- 
chase it, and it is abstractly conceivable that this might be the case 
with all commodities. The error is in not perceiving that though 
all whoi have an equivalent. tO' give might be fully provided with 
every consumable article which they desire, the fact that they go 
on adding to the production proves that this is not actually the 
case. Whoever brings additional commodities to the market brings 
an additional power to^ purchase ; he alsO' brings an additional desire 
to consume, since if he had not that desire he would not have 
troubled himself tO' produce. At most, it can be argued that the 
demand may be for one thing and the supply may unfortunately 
consist oi another. 

Driven to this last resort, an opponent may perhaps allege that 
there are persons who produce and accumulate from mere habit. 
They continue producing because the machine is ready mounted, and 
save and reinvest their savings because they have nothing on which 
they care to expend them. Such cases are possible; but do not 
affect our conclusion. For, what do these persons do with their 
savings ? They invest them productively ; that is, spend them in 
employing labor. Now will the laboring class also know what to 
do with it? Are we tO' suppose that they too have their wants per- 
fectly satisfied, and go on laboring from mere habit? Until the 



2x6 READINGS'IN ECONOMIC PROBLEMS 

working classes have also- reached the point of satiety, there will be 
no want of demand for produce. Thus, in whatever manner the 
question is looked at, the theory of general over-production im- 
plies an absurdity. 

121, A Modern Statement of the Over-Production Theory. 

1!Y PAUL LEROY-Bi:AULIEU. 

General economic crises result from great and sudden progress 
in production. For a time there is a universal and definite excess 
of production for the whole human race. When a crisis comes on 
it is necessary that there should be new adaptations to meet this 
sudden progress, and these adaptations require time and extraordi- 
nary effort. It is advisable to revise attentively all conditions of 
production. 

122. The Meaning of the Over-Production Theory. 

BY THKODORF, E. BURTON. 

The meaning of the over-production theory lies in the necessity 
for time as a factor in educating consumers to appreciate the value 
of new commodities, and in inducing those changes of habit and 
taste which are necessary to prevent an accumulation of products. 
At times there seems to be a sort o^f inertia in disposing of essen- 
tial and very desirable commodities, so great as to give plausibility 
to the contention of those who maintain that over-production is a 
positive fact. Their whole argument may be summarized by saying 
that the world more readily adopts innovations in production than 
in consumption. Improvements in production proceed from the 
more progressive, while increased consumption must proceed from 
a larger number who adopt changes more slowly. This slowness in 
m'aking use of new ot increased supplies is very unequal in differ- 
ent countries, though its effect is apparent everywhere; but this 
does not constitute general over-production. It rather describes 
a situation in which there is a temporary absence of adjustment be- 
tween different lines of production. There has never been a time 
when the scarcity of some articles of consumption was not a notice- 
able fact. To say that general over-production is possible is to allege 
that the human race can create more than it can use, and that men 
love to toil rather than to enjoy, deductions contradicted by all hu- 
man experience. 



THE CURRENCY PROBLEM 217 

E- GENERAL CAUSES OF CRISES AND DEPRESSIONS. 
123. A Socialistic Theory of Crises. 

BY AUGUST BEBIilv. 

The crisis arises because no' standard exists Vv'hereby the real 
demand for a commodity may at any time be measured and ascer- 
tained. There is noi power in bourgeois society that is enabled to 
regulate the entire production. In the first place, the consumers of 
a commodity are scattered over a wide area, and the purchasing 
ability of the consumers, who determine the consumption, is in- 
fluenced by a number of causes that no individual producer is able 
to control. Moreover, every individual producer must compete with 
a number of other producers whose productive abilities are unknown 
to him. Each one seeks tO' defeat his competitors by every means 
at his command : by a reduction in prices, by advertising, by giving' 
credit for prolonged periods, by sending out drummers, and even 
by cunningly and insiduously disparaging the products of his com- 
petitors, the latter means being especially frequently resorted to 
during critical times. The entire realm of production accordingly 
depends upon the subjective discretion of the individual. Every 
manufacturer must dispose of a certain quantity of goods in order 
to subsist. But he seeks to sell a far larger quantity, for this in- 
creased sale determines not only his larger income, but also the prob- 
ability of his triumphing over his competitors. For a while sales 
are insured, they even increase; this leads to more extensive enter- 
prises and to increased production. But good times and favorable 
conditions tempt not only one but all manufacturers to multiply 
their efforts. Production by far exceeds the demand. Suddenly 
it becomes manifest that the market is overstocked with goods. 
The sales slacken, the prices fall, production is limited. To limit 
production in any branch means to decrease the number of workers 
employed in this branch, and a reduction in wages, whereby the 
workers in turn are compelled to limit their consumption. The in- 
evitable result is that production and consumption in other branches 
slacken likewise. Sm^all dealers of all kinds, shopkeepers, bakers, 
butchers, etc., whose chief customers are workingmien, fail to dis- 
pose of their goods and also sufifer want. 

Since one industry furnishes the raw material to another and 
one depends upon the other, the ills that befall one must affect the 
others. The circle of those affected widens. Many obligations 
that had been entered upon in the hope of prolonged favorable con- 



2i8 READINGS IN nCONOMlC PROBLEMS 

ditions cannot be met, and heighten the crisis that grows worse from 
month to month. A heap of accumulated goods, tools and machines 
becomes almost worthless. The goods are ferquently sold under- 
price and this often leads to^ the ruin of the owners of such goods 
as well as tO' the ruin of dozens of others who- in turn are com- 
pelled to sell their goods underprice also. But even during the crisis 
the methods of production are constantly improved in order to 
meet the increased competition, and this means again forms a 
cause for new crises. After a crisis has lasted for years and over- 
production has gradually been removed .by selling the products 
underprice, by limiting production, and by the ruin of smaller manu- 
facturers, society slowly begins to recuperate. The demand in- 
creases again, and promptly the production increases also, slowly 
and carefully at first, but more rapidly with the prolonged duration 
of favorable conditions. People seek to reimburse themselves for 
what they have lost and seek to secure their portions before a new 
crisis sets in. But as all manufacturers are guided by the same 
impulse, as they all seek to improve the means of production in 
order to excel the others, a new catastrophe is ushered in more 
rapidly and wath still more disasterous results. Countless lives rise 
and fall like bubbles, and this constant reciprocal action causes the 
awful conditions that we experience during every crisis. The crisis 
becomes more frequent as production and competition increase, not 
only among individuals, but among entire nations. The small battle 
for customers, and the great battle for markets, becomies increasing- 
ly severe and is bound to end with enormous losses. Meanwhile 
goods and supplies are stored away in masses, but countless human 
beings who wish to consiune, but are unable to buy, suffer hunger 
and privation. 

124. Why a Crisis Arises. 

BY j". I^AWKENC]]; I.AUGHIJN. 

A crisis arises, not because of a scarcity of a medium of ex- 
change in the hands of the public, but because large banks have had 
excessive demands made upon them for loans, and because they hold 
paper which has become more or less unsound. A crisis comes be- 
cause credit has been unduly expanded in a period of prolonged 
prosperity and in an optimistic spirit men have entered into trans- 
actions beyond their actual means, as shown when the test of actual 
payment is exacted, and in time of fright, collateral, as well as goods, 
falls in price. In such a situation liquidation needs time if disaster 
is to be prevented. Houses doing a legitimate business are in trouble 



THE C URRUNC Y PRO BLUM 2 1 9 

and the banks are called upon to carry them. Just when timid per- 
sons or country banks are drawing down cash reserves, the banks 
are forced by the situation to- increase their loans. At their own 
risk they come to the rescue of a hard-pressed business public. 

125, How a Rise of Prices Culminates in a Crisis. 

BY IRVING FISHER. 

When causes, whatever they may be, bring about a rise in prices, 
the events which follow in sequence may be briefly stated as follows : 
I. Prices rise. 2. Entrepreneurs get much higher prices than 
before, without having much greater expenses, and therefore make 
greater profits. 3. Encouraged by large profits, they expand their 
loans. 4. Deposit currency expands relatively to money. 5. Be- 
cause of this expansion prices, continue to rise ; that is, phenomenon 
Nio. I is repeated. Then No-. 2 is repeated, and sO' on. In other 
words, a slight initial rise of prices sets in motion a train of events 
which tends tO' repeat itself. This cycle continues as long as the 
enterpreneur's profits continue abnormally high. 

In particular, trade will be stimulated by the stimulation of loans. 
These effects are always observed during rising prices, and people 
note approvingly that "business is good" and "times are booming." 
Such statements represent the point of view of the ordinary busi- 
ness man who- is an enterpreneur. They do> not represent the senti- 
ments of the creditor, the salaried man, or the laborer, most of whom 
are silent, but long suffering, paying higher prices, but not get- 
ting proportionally higher incomes. 

But this expansion cannot proceed forever. A check' upon 
its continued operation lies in making loans harder tO' get. As soon 
as this occurs the whole situation is changed. The banks are forced 
in self-defense to refuse loans because they cannot stand so ab- 
normal an expansion of loans relative to reserves. The borrower 
can no longer hope to make great profits, and loans cease to expand. 

Now an enterprise, as it is started by borrowing, is expected to 
continue by renewed borrowing. But with loans hard to get, the 
persons who have counted on renewing their loans on the former 
terms and for the former amounts are unable to do so. It follows 
that those who cannot contract new debts cannot pay old ones, and 
are destined to become insolvent and fail. The failure, O'r prospect 
of failure of firms that have borrowed heavily from^ banks induces 
fear on the part of many depositors that the banks will not be able 
to realize on the loans. Hence the banks themselves fall under 
suspicion and, for this reason, the depositors demand cash. Then 



2 20' READINGS IN ECONOMIC PROBLEMS 

occur "runs on the banks," which deplete the bank reserves at the 
very moment they are most needed tO' pay the demands of the de- 
positors. Beingf short of reserves, the banks have tO' curtail their 
loans. Renewed borrowing becomes difficult or impossible. The 
entrepreneurs whoi are caught must have currency tO' liquidate their 
obligations or else become insolvent. Somie of them are destined to 
become bankrupt and, with their failure, the demand for loans is 
correspondingly reduced. The culmination of an upward price 
movement is what is called a crisis, a condition characterised by fail- 
ures which are due to a lack of cash when it is most needed. 

126. The Capitalization Theory of Crises. 

BY FRANK A. FETTKR. 

Capitalization runs through all industry. The value of every- 
thing that lasts for more than a moment is built in part upon in- 
come which is not actual, but expectative, whose amount, there- 
fore, is a matter of guesswork, or speculation. Many unknown 
factors enter into- the estimate of future incomes. The universal 
tendency to rhythm in motion manifests itself in an overestimate or 
underestimate of income. Most men follow a leader in investment 
as in other things. The spirit of speculation grows until it becomes 
almost a frenzy and people rush toward this or that investment, 
throwing capitalization in some industries far out of equilibrium 
with that in others. 

The use of credit enhances the rhythm of price. A large part of 
business is done on margins. If the value of a thing fully paid for 
falls in the hands of the owner, he alone loses ; but, if the value 
of a thing only partially paid for falls so much that the owner is 
forced to default in his payment, the loss may be transmitted along 
the line of credit to^ every one in the series Oif transactions. A 
credit system, highly developed, is a house of cards at a time of 
financial stress. There is an element of credit in almost all busi- 
ness. Entrepreneurs enter into strenuous rivalry to secure the 
profits of a rise, ever hoping to get out whole before the crisis 
comes. 

The fundamental cause of crises thus is seen to be psychological ; 
it is the rhythmic miscalculation of incomes and of capital value, 
occurring to some degree throughout industry. This is given full 
opportunity for action only when certain favoring objective con- 
ditions are present. Most noteworthy of these is the dynamic con- 
dition of industry. The past century has opened up new fields of 
investment on an unexampled scale. New machinery and processes 



THB CURRENCY PROBLEM 221 

have givdn undreamed of opportunity for enterprise. Such factors 
disturb the equiHbrium of prices both in time and space, give a 
powerful stimukis towards higher values, and stimulate the hopes 
of all investors. When the balance between the capitalization of 
various industries and between the income of various periods proves 
to be false, the inevitable readjustment causes suffering and loss to 
many, but particularly in the inflated industries. But, because of 
the mutual relations of men in business, few even of those who have 
kept freest frora speculation can quite escape the evils. . 



F. CRISES AND INDUSTRIAL CLASSES. 
127. The Order of Events in a Crisis. 

BY ARTHUR T. HADLEY. 

The order of events in a crisis is generally this : 

1. A shock tO' public confidence in a period of liberal, not to 
say inflated, credit, creates a demand for ready money. No' one is 
sure that his neighbor will remain solvent. Each man is therefore 
anxious to* secure himself against future loss. Every borrower 
seeks means of paying his obligations and increases the demand for 
money; almost every capitalist tries to enlarge his cash reserves 
and thus lessens the available supply. 

2. This increase of demand and diminution of supply at first 
puts up the interest rate on short-time loans. Money is needed to 
tide over the immediate exigency, and every one is willing to pay 
large prices in order to obtain it. But this is only a temporary 
measure. Under the stress of need for securing money, people who 
have engagements to meet sell their goods at a sacrifice in order 
to obtain it. An unusually large supply of products and securities 
is thrown upon the market just at the time when many property 
owners feel themselves least able to invest, and when some con- 
sumers are restricting their purchases instead of expanding them. 
The temporary increase in the interest rate gives place to a more 
lasting fall in prices. 

3. Such a fall in prices lowers profits. A large number of 
people have made engagements with their creditors and with their 
employees based on the supposition that prices will continue at the 
old level. A fall in price renders it impossible to pay interest out 
of current earnings. Readjustments and foreclosures follow one 
another in rapid succession. In cases where the lenders of money 
have obtained proper security the contracts are maintained at the 



222 



READINGS IN ECONOMIC PROBLEMS 



expense of the principal of the borrowers. If a railroad bond is 
really secured by stock behind it, the loss falls on the stockholders, 
and the bondholders, ultimately at any rate, receive all that the in- 
terest contract calls for. But if, as frequently happens, the security 
has been a delusive one, the lenders are compelled to assent to a 
reduction of the interest which they believe to be safely guaranteed. 

4. When the interest contracts have been in large measure re- 
adjusted, the chief effect on wages begins to make itself felt. It 
might be supposed, on general grounds, that a fall in price would 
affect the laborer sooner than the investor. But in the early stages 
of a commercial crisis the capitalist is not in a position to dictate 
terms to his laborers. He must make goods and sell goods at any 
price, in order to keep his head above water. As long as it lasts, 
the cut-throat competition which lowers profits prevents the demand 
for labor from being very rapidly lessened. It is when readjust- 
ments of interest have been made that the laborers' condition be- 
comes worst. After foreclosure sales have been completed and 
capital is reorganized on a new basis, no capitalist is necessarily 
compelled to work at a loss, and some probably go out of work alto- 
gether. Under these circumstances the demand for labor becomes 
appreciably less than it was, and the price offered falls rapidly. 

The first moderate changes are as a rule accepted by the laborers 
as inevitable, but as reductions become more sweeping they are re- 
sisted, particularly because house rents and consumers' prices, owing 
to the inertia of retail tradC; do not fall nearly as fast as producers' 
prices. The workman sees his wages reduced because his employer 
cannot sell goods at the old figure, while the price that he pays 
for his supplies remains nearly the same. • He thinks that something 
is wrong and strikes. This usually indicates the beginning of the 
end of a co^mmercial crisis. It has become a proverb in the financial 
world that railroad strikes give no help to those who are trying to 
depress the price of securities. 

On the contrary, in spite of the losses attending such conflicts, it 
has been found in 1877, 1885, and 1894 that the price of securities 
in general began to go^ up at the very time when matters seemed 
to be at their worst. There are two reasons for this. First, strikes 
cut down production in any given line to such an extent as to enable 
competing producers to dispose of their products or services more 
readily. Second, strikes indicate that wage contracts, as well as in- 
terest contracts, have been readjusted to the price conditions which 
prevail, and that matters have therefore' reached a point where 
speculators can make arrangements for the future with the assur- 



THE CURRENCY PROBLEM 223 

ance that the marginal price charged by labor and capital for their 
services does not exceed the market price which the consumers are 
likely to pay for the results of such service. 

128. How Crises Affect Various Classes. 

BY J. I.AWRENCK LAUGHUN. 

The suspension of specie payments has occurred at nearly every 
period of crisis or panic in the history of the United States. The 
effect has been to tie up funds for an indefinite period often lasting 
several weeks. 

The hardship inflicted has fallen with exceptional severity upon 
the laboring class in the community, because that class is more lim- 
ited in its resources and its menibers are not usually able to get the 
extensions of credit from tradesmen that are accorded to others of 
larger means. The average laborer conducts his affairs largely on 
a cash basis, and is dependent upon cash at all times. The laborer 
who has no deposit at the bank and is absolutely dependent upon 
money wages from week to week has usually found his immediate 
earning capacity annihilated, owing to the inability of the banks to 
supply contractors and factory superintendents with the sums needed 
for the payment of wages. Thus it has occasionally been necessary 
to suspend industrial operations at a time when conditions were 
otherwise fairly prosperous because of a suspension of bank pay- 
ments. 

A merchant is invariably a depositor at his bank as well as a 
borrower. What he borrows he takes, not in actual money, but in 
the form of book credit. Checks and actual money received by 
him from his customers he deposits at the bank. His deposits at the 
bank are frequently less than what he owes the bank. It is there- 
fore vital to his success that he should continue to do business with 
the institution without interruption. A panic which compels the 
bank to call in its loans wipes out his deposit with the bank or com- 
pels him to get funds from other sources, perhaps at a very serious 
sacrifice. On the other hand a check to- business means that his 
customers cannot freely liquidate their obligations tO' him. In that 
event he may have to- ask for extensions of credit, or his deposits at 
the bank may be cut down below the figure which the bank con- 
siders necessary. At any rate he cannot go^ to the bank and with 
assurance demand liquidation of its obligations to- him. Thus the 
local merchant shares with his community the penalties of an in- 
adequate banking system. He is a victim of a rigid reserve system. 

The method in which a panic affects the agricultural section may 



224 



READINGS IN ECONOMIC PROBLEMS 



be shown hy what happened in the fall of 1907. Farmers, crop- 
tayers, and bankers were drawing on the large reserve centres for 
currency. Suddenly there came runs on certain New York banks 
that compelled caution on the part oi the other banks. The local 
situation and the agricultural demand made it impossible for the 
New York banks to satisfy all demands. They were comipelled to 
refuse currency shipments to many points. The banks at these 
points could not assist other interior banks dependent upon them. 
In a day the entire country was alarmed. Everybody wanted his 
deposits in cash, and there was not enough to go around and no 
possibility of getting more. The local banks had the notes of mer- 
chants and farmers — all good commercial paper — but they had no 
cash to pay out. The situation could not be relieved by the use of 
reserves in gold, for this th.e law does not allow. Depositors, there- 
fore, were compelled to wait. Loans became, if obtainable, very ex- 
pensive tO' the farmers. 

Te effects of such a crisis are far from falling evenly upon all 
classes in the commtmity. To the large retail merchant or manu- 
facturer, the depression may not mean more than a restriction or 
abolition of his opportunities for profit. If obliged to curtail his 
personal enjoyments or expenses, such curtailment will not be of a 
kind that entails much hardship. He may be somewhat less prodigal, 
and may endeavor to* cut off some unnecessary outlays of large 
amount. The serious eft'ects are felt by employees in far greater 
m.easure. To the extent that the employee has been dependent upon 
his regular earnings, he will be affected by the reduction of employ- 
ment. If he has accumulated no savings, he immediately becomes 
dependent upon credit or charity for his support. If he has accumu- 
lated savings, he is obliged to fall back on these. Thus the weight 
of the shortage necessarily falls upon the employee either as wage- 
earner or as savings-depositor or as both. 

G. THE PANIC OF 1893. 
129. The Causes of the Panic. 

BY W, Je;TT LAUCK. 

But what was the local and the true cause of the crisis of 1893 
in this country ? It cannot be said to have been due to a scarcity of 
money in the United States at that time. During the entire period 
1878-93 the amount of money in circulation more than doubled. 
Consequently the money supply was ample. On the other hand, it 
cannot be maintained that the crisis of 1893 was caused by an ex- 



THE CURRENCY PROBLEM 225 

tension of the mercantile credits such as brought about the dis- 
astrous collapse of 1873, for business houses and industrial estab- 
lishments during the period 1891-93, instead of extending, were 
curtailing their operations, and were arranging their plans in the 
expectation oi a breakdown in the financial machinery of the coun- 
try. They could not have engaged in any extended or hazardous 
activities if they had been inclined to do so, for the reason, as al- 
ready seen, that very little, if any, foreign capital was obtainable 
for investment in the United States after 1891, and American cap- 
ital likewise refused to enter into doubtful financial or industrial 
undertakings. So far as the withdrawal of foreign and domestic 
funds, however, brought about industrial and business disaster, it 
was not a direct cause of the crisis, but only the result which flowed 
out of the operation of the primiary and fundamental cause. 

This cause to which the crisis of 1893 is directly and wholly 
attributable co'usisted of a widespread fear, both at home and 
abroad, that the United States would not be able to maintain a gold 
standard of payments. The very nature of the crisis itself bears 
out this conclusion. It was essentially a monetary crisis, and its 
typical feature consisted in the numerous failures of banks and 
financial institutions. Moreover, the precipitation of and the recov- 
ery from the crisis furnishes additional evidence to bear out the fore- 
going claim. The beginning of the crisis was marked by the decline 
of the Treasury gold reserve, on April 22, below the $100^000,000 
limit ; the ending of the resultant industrial and financial chaos dated 
from the repeal, on August 28, of the Silver Law of 1890. 

The apprehension in 1893 as to- the fixity of the gold standard 
of payments arose indirectly out oi the silver agitation and legis- 
lation during the period 1878-90, and was directly traceable to the 
operation of the Sherman Silver Purchase Law of 1890. For sev- 
enteen years, 1878-90, the gold standard of payments was constantly 
threatened, and the crisis of 1893 was practically the culmination 
of this long period of uncertainty. Under the operation of the Silver 
Act of 1878, the country received a serious shock to its confidence 
in the fixity of the gold standard. During the two years, 1884-86, 
when the silver issues of the country became redundant, the dis- 
trust in the ability of the Treasury to^ maintain gold payments became 
so great that gold was withheld in the payments of customs duties, 
and silver certificates were worked off on the Treasur}^ Additions 
to the Treasury's supply of gold were thus cut off, and the gold re- 
serve declined to $115,000,000. As a consequence, apprehension as 
to the maintenance O'f gold payments became widespread, and a 
panic was narrowly averted. As it was, the stream of silver was 



2 26 READINGS IN BCONOMIC PROBLEMS 

only prevented from overflowing the Treasury by the action of the 
Treasury officials in employing" artificial devices to create a vacuum 
in the circulation. 

The advocates of the free coinage of silver, however, held the 
balance of political power during the first session oi the Fifty-first 
Congress, and as a result of their agitation the Sherman Taw was 
passed, which almost doubled the amount of silver obligations an- 
nually issued by the Government. The currency of the country 
soon became redundant, and silver certificates and Treasury notes 
were used in the payments of public dues, while gold was hoarded. 
Consequently the Treasury gold reserve rapidly declined, and fear 
for the maintenance of the standard again arose. Foreign investors 
and exporters saw the danger in the situation even before the people 
of this country, and began tO' withdraw the funds which they had 
invested in this country during the period 1886-90. Moreover, they 
called for the payment of trade balances in gold. Gold was, there- 
fore, demanded for export. But the banks in the United States 
were hoarding gold, and gold for export could practically be ob- 
tained only by the presentation of legal-tender notes at the Treasury 
for redemption. This operation caused a further inroad upon the 
Treasury gold reserve. Larger amounts of funds were drawn from 
the country, and increasing amounts of gold flowed out of the Treas- 
ury in the redemption of legal-tenders. The limit was finally reached 
on April 22, 1895, when the gold resen^e fell below the danger-line. 
At that time the fears of the public over the question of the standard 
of payments reached a climax. 

As soon as it became known that the gold reserve of the Treas- 
ury had declined below the danger-point of $100,000,000 the appre- 
hension relative to the fixity of the standard developed into a panic. 
There was an immediate rush to realize on all descriptions of prop- 
erty before the gold standard was abandoned. The public were 
afraid of the adoption, as the standard of payments, of a silver dollar 
which v/as worth only fifty cents in gold. At the same time over- 
whelming demands were made upon the banks to pay their accounts 
in gold or specie, and the cash thus obtained by depositors was 
hoarded and the existing money supply contracted. Under these 
conditions gold seemed scarce. In reality gold was only relatively 
scarce in comparison with the abnormial ofifering of property for 
sale on account of the fear of the silver standard. In the face of 
the universal demand, however, to convert property into cash or 
some other liquid form of exchange, those having obligations to 
meet found it impossible to secure funds, and the result was soon 
seen in widespread industrial and financial disaster. 



THE CURRENCY PROBLEM 227 

130. The Course of the Panic. 

BY AI.EXANDER D. NOYJ^S. 

The pubHc mind was on the verge of panic. During a year or 
more, it had been continuously disturbed by the undermining of the 
Treasury, a process visible to all observers. The financial situation 
in itself was vulnerable. In all probability, the crash of 1893 would 
have come twelve months before, had it not been for the accident 
of 1891's great harvest, in the face of European famine. 

The panic of 1893, in its outbreak and in its culmination, followed 
the several successive steps familiar to all such episodes. One or 
two powerful corporations, which had been leading in the general 
plunge into debt, gave the first signals of distress. On February 
20th, the Philadelphia and Reading Railway Company, with a capital 
of forty millions and a debt of more than $125,000,000, went into 
bankruptcy ; on the 5th of May, the National Cordage Company, 
with twenty millions capital and ten millions liabilities followed suit. 
The management of both these enterprises had been marked by the 
rashest sort of speculation; both had been favorites on the specu- 
lative markets. The Cordage Company in particular had kept in the 
race for debt up to the moment of its ruin. In the very month of 
the company's insolvency, its directors declared a heavy cash divi- 
dend ; paid, as may be supposed, out of capital. In January, National 
Cordage stock had advanced twelve per cent on the New York 
market, selling at 147. Sixteen weeks later, it fell below ten dollars 
per share, and with it, during the opening week of May, the whole 
stock market collapsed. The bubble of inflated credit being punc- 
tured, a general movement of liquidation started. This movement 
immediately developed very serious symptoms. 

Panic is in its nature unreasoning; therefore, although the finan- 
cial fright of 1893 arose from fear of depreciation of the legal 
tenders, the first act of frightened bank depositors was to withdraw 
these very legal tenders from their banks. Experience has taught 
depositors that in a general collapse of credit the banks would prob- 
ably be the first marks of disaster. Instinct led them to get their 
money out of the banks and intO' their own possession with the least 
possible delay, therefore when the depositors of interior banks de- 
manded cash, and such banks had in immediate reserve a cash fund 
amounting to only six per cent of their deposits, it followed that the 
Eastern "reserve agents" were drawn upon in enormous sums. 

On the Newi York banks the strain was particularly violent. 
During the month of June the cash reserves of banks in that city 
decreased nearly twenty millions ; during July, they fell ofl^ twenty- 



228 RBADINGS IN ECONOMIC PROBLEMS 

one millions more. The deposits entrusted to- them by interior 
institutions had been loaned, acording to the banking practice, in 
the Eastern market ; their sudden recall in quantity forced the East- 
ern banks to contract their loans immediately. But in a market 
already struggling to sustain itself from wreck, such wholesale im- 
pairment of resources was a disastrous blow. In the closing days of 
June, the New York money rate on call advanced to seventy-four 
per cent, time loans being wholly unobtainable. The early with- 
drawals by depositors in the country banks were only a slight indi- 
cation of what was to' follow. In July, this Western panic had 
reached a stage which seemed to foreshadow general bankruptcy. 
Two classes of interior institutions went down immediately — the 
weaker savings banks, and private baulks, distributed in various pro- 
vincial towns, which had fostered speculation through the use oi 
their combined deposits by the men who controlled them all. 

In not a few instances, country banks were forced to suspend at 
a moment when their own cash reserves were on their way to them 
from depository centers. Out of the total of one hundred and fifty- 
eight national bank failures of the year, one hundred and fifty-three 
were in the West and South. How wide-spread the destruction was 
among other interior banking institutions may be judg'ed from the 
fact that the season's record oi suspension comprised 172 State 
banks, 177 private banks, 47 savings-banks, 13 loan and trust com- 
panies, and 16 mortgage companies. 

During the month of July, in the face of their own distress, the 
New York banks v/ere shipping every week as much as $11,000,000 
cash to these Western institutions. Ordinarily, such an enormous 
drain would have found compensation in import of foreign gold, 
and, in fact, sterling exchange declined far below the normal gold 
import point. But the blockade of credit was so complete that oper- 
ations in exchange, even for the import of foreign specie, were im- 
practicable. Banks with impaired reserves would not lend even on 
the collateral of drafts on London. 

So large a part, indeed, of the Clearing-House debit balances 
were now discharged in loan certificates that a number of banks 
adopted the extreme measure of refusing tO' pay cash for the checks 
of their own depositors. Long continued, a situation of this kind 
must reduce a portion of the community almost to a state of barter ; 
and in fact a number oi large employers of labor actually made 
plans in 1893 tO' issue a currency of their own, redeemable when 
the banks had resumed cash payments. On the 25th of July, the 
Erie Railroad failed, the powerful Milwaukee Bank suspended, and 
the situation appeared well-nigh hopeless. 



THB CURRUNCY PROBLEM 229 

Relief came in two distinct and remarkable ways. Large as the 
volume of outstanding loan certificates already was, three New York 
banks combined to take out three to four millions more, and this 
credit fund was wholly used to facilitate gold imports. At almost 
the same time, the number of city banks refusing to cash depositors' 
checks had grown so' considerable that well-known money-brokers 
advertised in the daily papers that they would pay in certified bank 
checks a premium for currency. This singular operation virtually 
meant the sale of bank checks for cash at a discount. Through the 
money-brokers, therefore, depositors paid in checks the face value 
of such currency as was ofl^ered, plus an additional percentage. 

This premium rose from one and a half to- four per cent, and at 
the higher figures attracted -a mass of hoarded currency intO' the 
brokers' hands. This expedient was applied on an unusually large 
scale, and it had the good result of helping to keep the wheels of 
industry moving. Its bad result was that it caused suspension of 
cash payments in the majority of city banks; for, of course, when a 
premium of four per cent was offered in Wall Street, for any kind 
of currency, it was out of the question for the banks to respond un- 
hesitatingly to demands for cash by speculative depositors. Most of 
the banks cashed freely the checks of depositors where it was shown 
that the cash was needed for personal or business uses. 

The panic, in short, had ended, but not until the movement of 
liquidation had run its course. The record of business failures for 
the year gives some conception of the ruin involved in this fo^rced 
liquidation. Commercial failures alone in 1893 were three times as 
numerous as those of 1873, and the aggregate liabilities involved 
were fully fifty per cent greater. It was computed that nine com- 
mercial houses out of every thousand doing business in the United 
States failed in 1873 ; in 1893, the similar reckoning showed thirteen 
failures in every thousand. 

131. A Week of the Panic. 

Our markets have been more disturbed and excited this week 
than at any time this year. The situation looked unpromising when 
the week opened, and became daily more imsettled until Thursday, 
when there was a decided improvement; but yesterday the situation 
was again somewhat less favorable. Monday and Tuesday an un- 
usual number of failures among our banks and private firms were 
reported in various parts of the country, but especially in the West, 
some of themi being concerns of long standing and held in high 
repute. On those days, too, rumors became hourly more distinct 



230 



READINGS IN ECONOMIC PROBLEMS 



respecting the difficulties Erie's floating debt was causing the man- 
agement and the probabiHty of its becoming needful to put the road 
into the hands of receivers. Tuesday afternoon the announcement 
was made that receivers for the company, had been appointed. On 
Wednesday the failures referred to, the Erie receivership, and the 
state of the money market caused an unsettled and feverish opening, 
which conditions were used, and used mo'St efl:ectually, by those seek- 
ing to break prices, values of all the leading stocks gradually melt- 
ing away. This decline was favored by the fact that the outside 
public having money to- invest either looked upon the Erie receiver- 
ship as a more disturbing affair than the step warranted, or else 
were discouraged by the frequent flurries and declines in prices 
which have occurred of late, and so- for the time being kept off the 
market. The next day, Thursday, the outlook, as already stated, 
was much brighter, and so it was yesterday, though there was some 
reaction from the previous day, a further large break in General 
Electric stock being a disturbing feature. 

Money on call representing bankers' balances was not stringent 
until Wednesday. The loans early in the week were from 6 to 2 per 
cent, the latter figure being recorded on Monday after the inquiry 
for the day had been satisfied and there seemed to be an abundance 
offered. The demand for currency for shipment to the West, stim- 
ulated by the failure of the "Mitchell" bank at Milwaukee, and of 
banks at Louisville and Indianapolis, was urgent on Tuesday, and 
on the following day a calling in of loans by some of the banks and 
trust companies in this city and in Brooklyn created a disturbance 
in the money market, while the fall in stock values induced discrim- 
ination against collateral, and the rate was advanced tO' three-six- 
teenths of I per cent and interest, equal to- about 74 per cent per 
annum, and large amounts were loaned at one-eighth of i per cent 
and interest, equal to 51 per cent per annum. On Thursday there 
was an early demand for money which caused 51 per cent tO' be again 
recorded, but in the afternoon the rate fell to 6 per cent. Yesterday 
the course was much the same, the range being 51 and 2 per cent, 
with the close at the lowest figure. The average for the week was 
probably about 10 per cent. Renewals were at from 6 to 8, and 
while banks and trust companies quoted 6, very little was loaned 
over the counter at this figure, and the institutions that had money 
to loan offered it in the stock exchange. Time contracts continue 
in urgent demand and good rates are bid, but the supply is small 
and chiefly confined to private sources. Neither banks nor trust 
companies are making loans on time, but it is probable that a few 
of the insurance companies and other corporations have yielded to 



THE CURRENCY PROBLEM 231 

the importunities of brokers. The basis of the business is 6 per 
cent; in addition i per cent commission is paid for thirty days, i}^. 
per cent for sixt}^ days, and 2 per cent for four months. Scarcely 
anything is done in commercial paper, and the few transactions made 
are at such rates as can be agreed upon. Many of the jobbing com- 
mission houses are advising the mills with which they do business 
tO' shut down, as it is impossible at present tO' make advances, and 
many of the mills at the East are consequently closing. 

132. The Premium on Currency. 

Other than the President's message and the meeting of Congress, 
which we have remarked upon in a subsequent column, the premium 
on gold and currency that has prevailed has been the important topic. 
This feature in the situation we referred tO' last week when it had 
developed only very moderate proportions. From that beginning, 
however, the demand for currency gradually grew more urgent, the 
premium rising as high even as 5 per cent, disclosing a marked scarc- 
ity of currency, not alone in this city but very noticeable at Phila- 
delphia and Boston in the East and Chicago and other centers in the 
West. All kinds of currency were in request including even stand- 
ard silver dollars. Foreign bankers also report that i^ per cent 
was paid for gold to arrive. Of course the gold import movement 
had been affected by these operations, which in turn have raised 
foreign exchange rates materially, since the premium paid raises 
the power of exchange and consequently the point at which gold 
can be imported at a profit. Thursday, however, there were decided 
indications that the transactions in currency had culminated. On 
that day the supply was increased by large offerings and the demand 
slackened. Yesterday the same conditions continued to prevail, and 
the premium on currency dropped to i^A and 2 per cent. 

133. The Hoarding of Currency. 

BY J. De; WITT WARNER. 

Then developed the feature that will forever characterize the 
stringency of 1893 — instructive to those who have not already learn- 
ed how immaterial is any ordinary supply of legal currency when 
compared with credit in its various forms — the real currency of the 
country. Almost between morning and night the scramble for cur- 
rency had begun and culminated all over the country, and the pre- 
posterous bulk of our circulating medium had been swallowed up 



232 READINGS IN ECONOMIC PROBLEMS 

as effectually as, in a scarcely less brief period, gold and silver had 
disappeared before the premium, on specie a generation before. Cur- 
rency was hoarded until it became so^ scarce that it had to be bought 
as merchandise at a premium of i to 3 per cent in checks payable 
through the clearing-house; and to enable their families tO' meet 
petty bills at the summer resorts the merchant and professional men 
of the cities were forced to purchase and send express packages of 
bills or coin ; while savings banks hawked their government bond 
investments about the money centers in a vain effort to secure cur- 
rency. 

134. The Effect on Trade. 

The month of August will long remain memorable as one of the 
most remarkable in our industrial history. Never before has there 
been such a sudden and striking cessation of industrial activity. Nor 
was any section of the country exempt from- the paralysis; mills, 
factories, furnaces, mines nearly everywhere shut down in large 
numbers, and commerce and enterprise were arrested in an extra- 
ordinary and unprecedented degree. The complete unsettlement of 
confidence and the derangement oi our financial machinery, which 
made it almost impossible to obtain loans or sell domestic exchange, 
and which put money to a premium over checks, had the effect of 
stopping the wheels of industry and of contracting production and 
consimiption within the narrowest limits, so that our internal trade 
was reduced to very small proportions — in fact, was brought almost 
to a standstill — and hundreds of thousands of men thrown out of 
employment. 

135. Various Aspects of the Panic. 

While special telegrams from many points South and West re- 
port a more hopeful feeling in financial and commercial circles, due 
to the increased currency issue by New York national banks, the 
gold afloat for the United States, and in the expectation that Con-, 
gress will promptly repeal the compulsory purchase of silver clause 
of the Sherman Act, the week has, on the whole, brought more un- 
favorable features in the apparent hoarding and scarcity of currency 
East and West, the near approach of the demand for funds to "move 
the crops," the increase in the shut-down movement by manufactur- 
ers in New England, Middle and Central Western States, and the 
clog to trade shown by prohibitive rates for New York exchange 
at centers East, West, and Northwest. Chicago packers and grain 
shippers selling to interior eastern points, having been unable to 
sell their New York exchange, are ordering the currency to pay for 



THB CURRENCY PROBLEM 233 

stuff shipped direct by express, thus doing away with banks. At 
New York credit of both banks and commiercial interests is unim- 
paired, but actual money is scarce and commands a premium. The 
arrival of gold in transit is expected to clear the atmosphere and 
relieve pressure. Demands for actual currency from all quarters on 
New York are pressing. The scarcity of small notes and silver dol- 
lars is a feature. Banks are generally refusing or complying only 
partially with requests for large sums. 

The irrational but widespread hoarding of currency has com- 
pelled jobbers and manufacturers in many instances to do business 
more nearly than ever on a cash basis, which has resulted in a further 
restriction of trade throughout the country. This is accompanied 
by such signs of aggravation as increased difficulty in disposing of 
commercial paper, a still greater scarcity of currency at larger cen- 
ters, and a shut-down movement among industrial establishments; 
the latter, together with curtailment of forces in that and in com- 
mercial lines, points to the enforced idleness of nearly 1,000,000 
wage-earners within the past two months, as compared with not 
more than 400,000 at the close of 1884, the previous year of greatest 
business depression. The week's bank clearings total is the smallest 
of recent years — $802,000,00^0 — 17 per cent less than last week and 
20 per cent less than in the week of 1892. 

A hand to^ mouth demand for staples is reported from Boston ; 
many leading industries have shut down, currency is scarcer, com- 
mercial paper is ignored, and general business rather more clogged 
than last week, all of which applies as well to^ New York, Philadel- 
phia, Baltimore, and Pittsburg. 

Increased demands from country banks make currency scarcer 
at Cleveland and Cincinnati, where previous dullness is intensified. 
Business at Louisville is almost at a standstill, banks declining to 
receive country checks even for collection, and preferring not to 
handle New York exchange. General trade is almost on a cash 
basis at Indianapolis, and reduced in volume, which is also true at 
Milwaukee. Chicago bankers are hopeful, owing to the heavy gold 
importations, but orders left with jobbers are held awaiting crop 
advices, some of the latter being doubtful. St. Paul, Minneapolis, 
and Duluth jobbers are doing a hand to mouth business, awaiting 
a change in the situation. St. Louis reports a shrinkage in the vol- 
ume of sales of dry goods and hardware, while at Omaha banking 
accommodations and the volume of trade continue in reduced vol- 
ume. Live stock receipts are smaller, with higher prices, and the 
corn crop is damaged in western Nebraska. 



. 234 READINGS IN ECONOMIC PROBLEMS 

H. THE PANIC OF 1907. 
136. Is a Panic Imminent?* 

BY HEJNRY HALL. 

It is useless to^ deny that many, perhaps a majority, of the factors 
which, on previous occasions, have foreshadowed a financial panic 
and reaction in trade in the United States, are present at this moment 
in national affairs. 

A most remarkable and unprecedented feature, however, is the 
fact that the coming panic, if one is actually imminent, has been so 
extensively advertised. Hitherto, panics have generally found the 
financial world unprepared ; and the trouble has always come with 
the suddenness and fury of the descent of a meteorite from the 
heavens above, a terrific explosion oi gunpowder, or a West Indian 
tornado'. Warnings have been uttered galore. 

As far back as October 11, 1905, Frank A. Vanderlip preached 
conservatism at a meeting of bankers and avowed the fear that the 
strain on our currency system might bring disaster. 

On October 27, 1905, E. H. Harriman cast serious doubt on the 
future by asserting that the country was about to run into an era 
of competitive railroad building. 

On January 4, 1906, Jacob H. Schiff told the Chamber of Com- 
merce of New York City, then in session tO' discuss the scarcity of 
the cash supply : "Mark what I say : If this condition of affairs is 
not changed, and changed soon, we will get a panic in this country, 
compared with which the three which have preceded it would be only 
child's play." 

Not to lag behind as a pessimistic oracle, J. J. Hill called atten- 
tion, January 29, 1906, to the extravagance of the American people 
in their expenses for luxuries and pleasure. 

The dangers may be summarized, in order tO' have them clearly 
before the mind : 

1. The appalling issue of over $1,640,000,000 of new securities 
in 1906, and the recent call of the Pennsylvania Railroad on its stock- 
holders for $200,000,000 more. Nothing like this has ever been 
known in this land of mighty things, not even in the "indigestible 
security" period of 1902. 

2. The enormous expansion in business, which extends tO' every 
county and hamlet in the country, and is in fact world wide. In 

* This article was published in February, 1907. 



THE CURRENCY PROBLEM 235 

spite of the great increase in American bank note currency and gold 
production, business has at last overtaken and nearly overwhelmed 
the resouirces of the banks. Take a single instance : From a total 
of $1,539,000,000 in 1895, our foreign trade has risen to $2,970,000,- 
000 in 1906. No country, no man, can expand his business in any 
such wa}^, without the use of more money to carry it on with. This 
expansion is repeated in every vocation in the United States ; and the 
total vokune of transactions has grown more swiftly than the cash 
supply. 

3. The high prices of all commodities, again requiring more 
money for the transaction of business. 

4. Increase of wages in all principal callings, which has added 
an expense of about $200,000,000 annually to the railroads and in- 
dustries of the country and promises a diminution o^f net earnings. 

5. The furore for new buildings in cities and the speculation in 
farm lands and other unimproved property. 

6. Personal extravagance of the people, which is evident on 
every side, and which, so far as motor cars are concerned, is leading 
many people to mortgage their realty. 

7. Heavy loss of capital by the San Francisco earthquake, 
$175,000,000 of which fell on the insurance companies and $125,- 
000,000 on the people of the city. This must be coupled with the 
loss from wars and various calamities in other parts of the world. 

8. Rottenness in financial methods, as exposed in the past few 
years in notable public investigations, with more coming to light 
every day. 

9. Retirement from active circulation in New York state in 1906 
of $50,000,000 oi good and lawful money, now locked up under the 
new law as trust company reserves. This loss of active cash, com- 
ing at a most inconvenient juncture, is equivalent to the destruction 
of an equal amount of money. 

10. The fact that loans at the banks are more extended, com- 
pared with reserves, than ever before in our history. Last Decem-- 
ber, deposits in the banks of this city were $62,500,000 less than 
loans, an unparalleled event. In the worst times of 1893 and 1903, 
deposits were never more than $40,000,000 less than loans. It is 
unnecessary to dwell on the dangers of such a situation. 

11. And finally, the excessively high rates of interest, which 
have prevailed for a year or' more, and which recur with every 
additional call for funds. 



236 READINGS IN BCONOMIC PROBLEMS 

137. The Irrepressible Crisis.* 

BY W. H. LOUGH, JR. 

We may make a list of 12 factors to be considered in sizing up 
the present situation. They are arranged approximately in inverse 
order to their immediate influence. 

1. The state of the public mind. 

2. Production and volume of credit in extractive industries. 

3. Production and volume of credit in manufacturing industries. 

4. Production and volume of credit in transportation industries. 

5. Output of mortgages and bonds. 

6. Output of credit currency. 

7. Output of loans and discounts. 

8. Output of book credits. 

9. Trend of general prices. 

10. Treasury and bank reserves of cash. 

11. Output of gold. 

12. Tendency of foreign exchange. 

If we could get complete and accurate information about each 
one of these 12 factors we could come to some definite and practically 
certain conclusion as to the business future. Suppose we try to sum 
up briefly the data available at present about each of the factors 
named. 

1. It is obvious that neither over-confidence nor speculative 
mania is or has been especially strong. On the contrary, intelligent 
opinion is notably conservative. Retrenchment, not headlong ex- 
pansion, is the order of the day. Land booms have been reported 
f romi various parts O'f the country, but apparently they have not been 
attended with the excitement that has existed in such cases at other 
times. 

2. The extractive industries, agriculture and mining, have made 
new records in volume of production in the year just passed with- 
out interfering with prices to any marked extent. The yields of corn 
and winter wheat were greater than ever before. Other crops were, 
on the whole, extraordinary, and 1906 came as the climax of several 
previous years of large agricultural output. The prospects for 1907 
are favorable. 

3. Manufacturing industries, as is well known, have made great 

* This article was outlined in February, 1907, and barely missed getting 
into the March number of Moody's in which editorial mention of it was 
made. Its statements as to financial weakness were, at least in part, verified 
by the extreme declines in security values during the month of iMarch. 



THB CURRENCY PROBLEM 237 

strides in the last three years. To^ take two examples which happen 
to be at hand, we find new buildings contracted for in 1906 worth 
$750,000,000 and we find an output of 25,000,000 tons of pig iron 
in 1906, against 23,000,000 tons in 1905, the best previous year. The 
pig iron was used largely for structural steel and railroad equip- 
ment. A falling ofif in the demand for these two products would 
undoubtedly affect a great amount of outstanding securities, and 
short time credit. In the opinion of excellent judges, a decline in 
the demand is already at hand, and will in all probability become 
more evident as the year progresses. As to other lines O'f manufac- 
turing we may say, in general, that production is large and increas- 
ing, but apparently not yet excessive. 

4. New railroad trackage built in 1906 reached a total of over 
6,000 miles ; but this new mileage is nothing compared tO' that con- 
templated for the next few years. The Northwestern railroads are 
especially active, and in that region the "era of competitive railroad 
building," predicted by E. H. Harriman, is at hand. What the 
effects will be on the large volume of new railroad stocks remains to 
be seen. Within the last twO' months railroad managers have begun 
to move a little more slowly in extending and improving their lines. 
Nevertheless railroad rebuilding and enlargement is still progressing 
on a great scale, for transportation facilities are plainly inadequate. 

5. In considering long time debts, we should note first the strik- 
ing unpopularity of bonds with the investing public. The reluc- 
tance of investors to put their money intO' mortgages and bonds, is, 
of course, a natural result of high prices and big semi-speculative 
profits, which make bond returns look small. 

6. In the amount of credit currency issued by the government 
we find, of course, no important change in the last few years. The 
volume of bank notes outstanding, however, has steadily increased 
from $172,000,000, in 1894, to about $585,000,000, now. The fact 
that the increase has been brought about by more liberal laws and 
by the lowered price of government bonds, rather than by business 
demands, naturally leads us to suspect its stability. 

7. The present status of bank loans and discounts is best indi- 
cated by the following totals oi this item for all national banks : 
1896, $1,873,000,000; 1900, $2,710,000,000; 1906, $4,300,000,000. 
These are most surprising figures in view of the comparatively slight 
increase in population and real capital during the same period. They 
grow more astonishing still when we think of the great increase in 
other banking business during the last ten years. The rate of in- 
crease would be almost beyond belief if the figures were not thor- 
oughly trustworthy. 



238 READINGS IN ECONOMIC PROBLEMS 

8. Under the term "book credits" I mean to include all the 
great body of accommodation extended by merchants to individual 
customers and by wholesalers to retail firms. Of course it is im- 
possible to compute its amount. All we can say is that, beyond ques- 
tion, it must exceed in volume anything that this country has ever 
previously known. If a wave of credit restriction should set in, a 
great many individuals and firms would be compelled to shorten 
sail in a hurry. 

9. The trend of general prices in the last few years is too well 
known to call for much discussion. Dun's index numbers for a 
few years past are as follows: 1897, 75.5; 1898, 79.9; 1899, 80.4; 
1900, 95.3; 1901, 95.7; 1902, 101.6; 1903, 100.4; 1904, loo.i; 1905, 
100.3 ; 1906, 105.2. These prices are the inevitable result of the out- 
put of gold and of credit during this period. 

10. The total gold coin and certificates in circulation in the 
United States was, in 1896, $497,000,000; in 1900, $811,000,000; in 
1906, $1,263,000,000. The total national bank reserves of lawful 
money, in September, 1896, was $343,000,000; in 1900, $520,000,000; 
in 1906, $626,000,000'. The ratio of cash on hand to deposits at 
corresponding periods of the last few years has been: 1896, 19.1% ; 
1900, 15.9%; 1901, 14.7%; 1902, 13.2%; 1903, 14.3%; 1904, 15%; 
1905, 14%; 1906, 12.7%. Looking over the banking field, we see 
a general downward tendency in the proportion of cash reserves 
to the credit piled up on the reserves. Unless the downward ten- 
dency be reversed, according to all experience, the result will be 
disastrous. It is in order, then, to see what the prospect is of reliev- 
ing the situation by large additions of cash. 

11. The annual gold production of the world has increased 
from $202,000,000, in 1896, to over $400,000,000, in 1906, and the 
outlook is for a still greater production next year. But, sooner or 
later, the rising tide of prices is certain to cut ofif the less profitable 
production and lead to a restriction of output. 

12. We turn, as a last source of temporary relief, to the other 
commercial nations in the hope that from them the United States 
may draw additional supplies of gold. The principal foreign banks 
of the world are estimated to hold about $4,000,000,000 specie, in- 
cluding both gold and silver. The whole commercial world seems 
deluged with prosperity. No nation and no' bank has too much gold. 
On the contran,'-, every one is reaching eagerly for more on which 
to base an enlarged issue of credit. American banks will seek in 
vain in foreign markets for sufficient additions tO' their cash reserves. 

The experience of the last hundred years indicates that the forces 
now at Avork are driving us straight toward a crisis, — and I mean 



THE CURRENCY PROBLEM 239 

by crisis not a Wall Street flurry, snch as we have lately seen, which 
may come at any time from purely local influences, but a general, 
temporary break-down of industry. With credit everywhere ex- 
panded to the danger point, we are in a position from which only 
two means of escape are possible. One is a large and rapid increase 
in our gold reserves, which is out of the question. The other is a 
progressive restriction of credit, necessarily gathering momentum 
as it proceeds, which is another name for crisis. Just when or how 
the wave of credit withdrawals will start nO' one can tell. A big 
failure or a rash bit of legislation, or any one of a hundred inci- 
dents, which under normal conditions would do little harm, might 
set it going. 

So long as the decisive incident does not occur, — and, of course, 
it may not come very soon, possibly not for two or three years, — 
prices keep on rising and credit keeps piling up. For that reason the 
longer it is delayed the harder jolt it is likely to give. 

138. Conditions Leading up to the Panic* 

It did not take a prophet to foretell that, following the three 
months' decline in the price of stocks which culminated in the severe 
declines in March, a business depression would follow. The lessons 
of history make it certain that industrial contraction begins soon 
after a great decline in stock prices occurs. A few long-headed men 
last fall saw plenty of trouble ahead and began to prepare for it by 
unloading stock at high prices. Not, however, until the middle of 
March were there plenty of bears in evidence. Although financial 
experts worked overtime in March to convince us that the decline 
was temporary, due to mischievous legislation, close observers no- 
ticed within a few weeks after the collapse that the demand for 
luxuries, like diamonds, automobiles, and pianos, began to decline. 
Soon the railroads began to: curtail improvements ; then manufac- 
turers of electric supplies began to lay men off; then we read that 
the department stores of New York had discharged 2,000 employees, 
and expected to discharge 4,000 more; next we heard that manu- 
facturers in various lines were curtailing output, and that many big 
wholesale merchants had instructed their buyers in Europe to curtail 
purchases. A little later there appeared statistics of many kinds 
that indicate a shrinkage in business. Bank clearings, railroad earn- 
ings, smaller volume of business, and unsuccessful strikes are some 
of the evidences of the depression already upon us. 

Because of the destruction of old capital and of speculation and 

* This was published in July, 1907. 



240 READINGS IN ECONOMIC PROBLEMS 

new issues of securities calling* for more and more new capital as 
well as the unparalleled construction of building's and permanent im- 
provements, turning circulating intO' fixed capital, the banking situa- 
tion is now about the worst ever known. Never were liabilities so 
great and cash reserves lower in proportion to liabilities. Gradually 
conditions appear tO' be growing worse instead oi better. The 
forced liquidation in bonds and stocks had not this year been suffi- 
cient to improve the credit situation. 

The depreciation in shares is due to the rise in the price of cap- 
ital. The development of industrial enterprise has recently been too 
rapid for available capital. The one great cause is the lack of cap- 
ital to carry on the world's business on the scale now planned. The 
industrial and financial world has overreached itself. Although new 
capital is being created faster than ever before, the supply is not 
equal tO' the demand, and the business of the world must slacken 
for awhile. 

That the cash reserves oi the world are low, as compared with 
banking liabilities, is beyond question. In this country the surplus 
reserve, as shown by the New York bank statement of July 6, was 
$856,250. This is the first time since 1893 that the surplus reserve 
has fallen below $5,000,000, for the first week in July. Even more 
significant is the fact that loans have been increasing steadily in 
proportion to deposits, and that they now exceed deposits by 3.4%. 
In 1905 deposits exceeded loans by about 4%. These figures indi- 
cate an unstable equilibrium! in the business world. 

If these statistics are a fair index, the business world is today 
insolvent, under panic conditions. It owes more than it can pay, 
except by further borrowing from the banks. All that is necessary 
to precipitate a panic under such conditions is for the solvent por- 
tion of the depositors to become frightened and to withdraw their 
bank deposits. The banks will then be compelled tO' call loans and 
to demand payment fro'm the insolvent portion. Since only 5.6% 
of the resources of the banks are in cash, it is probable that many 
national banks are in a weak condition. Possibly the brakes will yet 
be applied in time to prevent serious trouble and to enable us to 
pass through the coming financial ordeal with a very slight reaction. 

139. Business Conditions in August. 

The banking and credit situation in this and other countries has 
not improved in the last month. Although the New York bank 
statements have been fairly good since July i, it is generally believed 
that they have been manipulated. Even as they stand they show 



THE CURRENCY PROBLEM 241 

the smallest surplus reserve in ten years. Notwithstanding the fact 
that the crops are poor and late, it is probable that, because of high 
prices and speculation, more money will be required to move them, 
and that the demand for it will come sooner than usual. 

The extreme tightness of money is shown by the market for 
coniimercial paper. The very best paper in the country is moving off 
slowly at 6%, while choice notes are selling at 6j^%, and a "raft" of 
good name paper is selling as high as 6)4%. 

Signs of depression are multiptying on all sides. It is now gen- 
erally admitted that the railroads are curtailing expenses wherever 
possible. Before making improvements railroad presidents are 
watching and waiting anxiously for a depression that will not only 
make labor plentiful, but make it efficient. Manufacturing and 
mercantile industries are also curtailing. This is especially true of 
the building, electrical goods, lumber, woolen, boot and shoe, and 
leather industries. The prices of copper and iron are declining 
rapidly. The prices of lumber and bituminous coal are also- weak- 
ening. These things indicate, that industry is slowing up. We 
shall probably know more about it by October. 

140. The Course of the Panic. 

BY HORACE; WHITE. 

Early in October, 1907, there were signs of trouble in the New 
York Stock Exchange. Prices of securities fell with great violence. 
On the 1 6th there was a crash in the market, started by the failure 
of certain speculators in copper-mining stocks. Public attention was 
thus directed to a group of banks in the manageniient oi which these 
persons were influential. These banks fell under suspicion and the 
rumors extended to other speculators and banking institutions sup- 
posed to be affiliated with them. On the 21st the National Bank 
of Commerce announced at the clearing house that it would no- longer 
be responsible for checks drawn on the Knickerbocker Trust Com- 
pany, one of the largest, and perhaps the most conspicuous, of the 
financial institutions of the city. On the following day there was 
a run on it by depositors, and it closed its doors after paying- $8,000,- 
000 over its counter. 

With the failure of the Knickerbocker Trust Company the panic 
became general. Prominent bankers held a meeting at midnight to 
take measures to stop it, and the Secretary of the Treasury, Mr. 
Cortelyou, came from Washington and promised to assist. 

On the 23rd a run on the Trust Company of America began, but 
the bankers gave it assistance sO' that it was able tO' pay out $13,000,- 



242 



READINGS IN BCONOMIC PROBLEMS 



ooo in cash in one day without closing its doors. On the same day 
a run was started on the Lincohi Trust Company, but was success- 
fully met. There was a renewed and heavy break on the stock ex- 
change, and the rate for call money rose to 90 per cent ; time loans 
could not be had on any terms. 

October 24th the panic reached its height; call money was not 
obtainable. A bankers' pool was organized to deal with the situa- 
tion. By offering $25,000,000 at 10 per cent they broke the dead- 
lock. Secretary Cortelyou deposited $19,000,000 in the banks. The 
run continued on the two trust companies, but all demands were met. 
During this time there had been a heavy drain on the New York 
bank reserves from banks in other parts of the country. On the 
26th the clearing house decided tO' issue loan certificates. This was 
virtually a general bank suspension, but while most of the banks 
used their discretion either to pay checks presented at their counters 
in cash, or to stamp them "good through the clearing house," several 
of them paid all checks presented without any discrimination what- 
ever. The example of New York was followed almost instanta- 
neously by all the clearing houses of the countr\'. A premium on 
currency made its appearance on November 2nd, and various devices 
for paying wages and carrying on retail trade by means of small 
certificates and pieces of stamped cardboard, were used everywhere. 
The premium on currency increased gradually to 4 per cent, as 
quoted in the newspapers, but in fact it reached 5 and 6 per cent in 
some instances where large sums were imperatively required. The 
exchanges of the country were thrown into confusion. On October 
29th Chicago drafts on New York were quoted at $2.50 per $1,000 
discount. In other places the usual country balances in New York 
had been so far drawn down that the banks in the interior, although 
having plenty of cash in hand, could not sell drafts on New York 
at all. 

It happened that we had been blessed with an abundant wheat 
harvest, while there had been a shortage in all European countries 
except France. The price of w^heat was accordingly the highest 
that had been known for several years, and the export of this staple 
gave our bankers an abundance of commodity bills with which to 
command gold abroad. Sterling exchange fell to $4.82 on October 
26, and to $4.80 on October 28, on which day $18,750,000 in gold 
was engaged in London for importation. This movement continued 
until December 23rd, during which time $107,000,000 in gold was 
imported, all of which was paid for with exported grain and cotton. 
During a part of this movement the quotations for demand sterling 



THE CURREXCY PROBLEM 



243 



were above par (S4.866), and even went as high as S4.91, so that 
some people said we were buying gold at a premiiim. But the 
quotation S4.91 was not a quotation of cash, but of bank checks 
that were selling in Wall Street at about 96 cents on the dollar. 
The premium on currency continued until the last of December. 

On November 17th announcement was made at Washington that 
the Treasury would come to the relief of the business community 
by issuing S5o,ooo,ocx5 of Panama canal bonds, and Sioo.ooo.ooo 
of one-year 3 per cent certificates of indebtedness. As both of these 
operations contemplated the borrowing of money from a market 
already staggering with the demands upon it, the promised relief 
was never experienced. The design of the President and Secretary 
was to issue a security which, by the offer of 3 per cent interest, 
would draw^ hoarded money out of its hiding place, and also to 
increase the amount of 2 per cent bonds in the market which could 
be used as security for national bank notes. There was a brief 
spurt on the stock exchange when this plan was promulgated, but 
on the next da}' the depression was as great as before, and on the 
three following days it became still greater. Critics said that the 
proposed issue of certificates was not authorized by law, and that 
the proposed issue of bonds, if lawful and successful, would be a 
fresh drain on the cash reser\-es of the banks which could not be 
recouped in months. Banking opinion was nearly unanimous that 
the government's inters-ention had not been helpful but the con- 
trar}'. 

Perhaps the most striking phenomenon of the panic was the 
rush of the countr\- banks to draw their money out of the central 
reser^'e cities, where the bulk of it was held. This proves that there 
is much human nature in bankers, but it proves even more con- 
clusively that our banking system is behind the age and needs better- 
ment. 

141. Shipment of Currency to the Interior. 

The clearing-house committee knew by experience that the dis- 
sipation of the Xew York banking reserve, upon which practicallv 
the credit volimie of the nation rests, would alarm the nation, in- 
tensify the panic, and greatly prolong the period of recuperation. 
Xew York bankers have been severely criticised because they did 
not more fullv respond to the demands of country- correspondents 
bv shipping currency against balances. To have fully honored the 
demands that were pouring in from all sections of the countr\' 
would have dissipated our banking reserve in a fortnight. How 



244 READINGS' IN ECONOMIC PROBLEMS 

could it be replenished? Were the interior bankers sending cur- 
rency to New York? What would have been the effect upon the 
country if the New York banking reserve had been entirely de- 
pleted ? It would have so intensified the panicky feeling that wide- 
spread commercial disaster would have resulted. The $53,000,000 
deficit in our banking reserve occurred in less than ten days after 
the failure of the Knickerbocker Trust Company, and was caused 
by the shipment to interior institutions of the larger portion of that 
amount in that short time. We kept the door of our treasure house 
wide open until for the good of the whole country it became neces- 
sary to ever}'where close it. It never was fully closed; currency 
shipments continued in a restricted way throughout the panic, and a 
larger number of our banks kept up their counter payments as 
usual. 

142. Resolutions of the Atlanta Clearing House.* 

In view of the action taken by the New York Clearing House, 
and subsequently adopted by Chicago, St. Louis, Philadelphia, Cin- 
cinnti, New Orleans, Nashville, Birmingham, Baltimore, Louisville, 
Memphis, Montgomery, Mobile, and many other principal cities 
throughout the country, restricting the shipment of currency, and 
the restriction of other business to its proper channel, the Clearing 
House ; therefore, be it 

Resolved by the Atlanta Clearing House Association — 

1. That until further notice collections and bank balances be 
settled in exchange for clearing-house certificates. 

2. That checks drawn on the members of this association be 
paid through the Atlanta Clearing House, and correspondents be 
requested to so stamp their checks. 

3. That payments against all accounts, including certificates 
of deposit, be limited to $50 in one day, or $100 in one week. 

4. That exception shall be made to the above in case of pay 
rolls, which shall be paid as follows : All denominations of $5 and 
over in clearing-house certificates, and all denominations of under 
$5 to be paid in cash as desired. 

Resolved further, That the manager of the Atlanta Clearing 
House Association be instructed to give notice to the correspondents 
of the Atlanta Clearing-House banks that the above resolution is in 
effect on and after this date and until further notice. 



* October 30, 1907. 



THE CURRENCY PROBLEM 



245 



143. Estimate of Money Hoarded. 

The national banks held $40,839,000 less cash on December 3 
than on August 22. And yet, during this period, the government 
increased its deposits in the national banks by $80,000,000, and there 
was imported about $70,000,000 in gold. Considering this increase 
of about $150,000,000, and the loss of $40,839,000, more than 
$190,000,000 of cash was taken out of the national banks in this 
period. It is cjuite certain that neither the savings banks nor the 
trust companies increased their cash holdings by any such amount. 
In fact, they had to close their doors to prevent the withdrawal of 
cash. It is probable that the trust companies of the country lost 
considerable cash, and that the savings banks gained none during 
this period. In ordinary years the national banks lose but little cash 
by crop movements — say $25,000,000. This is, perhaps, considerably 
less than the shrinkage this year in the cash holdings of the. trust 
companies. It would appear, then, that fully $200,000,000 of cash 
this year disappeared from our banks between August 22 and De- 
cember 3. 

144. The Panic and the Depreciation of Gold. 

The panic in the United States was, of course, due to* peculiar 
conditions : a bad currency and an unsound banking systemi ; lack 
of confidence in banking and industrial institutions ; great specula- 
tion due partly to excessive optimism; attacks on corporations, etc. 
Now, these causes are helf causes, but they are not fundamental. 
The fundamental cause of the present panic is the depreciation of 
gold. When gold is being produced in larger and larger quantities, 
we know that as compared with other products, its cost of produc- 
tion is declining more rapidly. This means that its value in exchange 
is falling. But gold, being the measure of all values, its price does 
not decline; the prices oi other things rise. When the prices oi 
other things are rising, there are great opportunities for specu- 
lation. Hence farseeing men will buy and hold non-perishable 
property. When a large proportion of the people try to live in 
this way there is trouble ahead. Speculation, if carried far enough, 
results in crises. 

Besides, depreciating gold and rising prices necessitate high 
rates for money and bring about decline in the prices of securities 
bearing fixed rates of income. This decline leads tO' much trouble in 
the financial and industrial world. It may in itself be sufficient to 
cause a crisis. 



246 READINGS IN ECONOMIC PROBLEMS 

145. The Extent of the Depression.* 

A few facts and figures will indicate the extent of the present 
industrial depression. Bank exchanges at all the leading cities of 
the United States were $2,073,910,424 for the week ending January 
30, 1908, a decrease of 23.3% compared with the corresponding 
week of 1907, and 37.2% compared with the corresponding week 
of 1906. The decrease in New York and Philadelphia exceeded 
28%, compared with 1906, and was greater than in any other cities. 
For the first two weeks of January, 1908, gross earnings of 
railroads were about 13% less than in 1907. For the last week in 
Decemher they were 15.52% below those of 1906. For the entire 
month of December gross earnings were 1.13%, while net earnings 
were 17.46% less than were those for December, 1906. 

Transactions of the New York stock exchange amounted to 
i6;634,8i7 shares, compared with 22,712,420 in January, 1907. The 
decline in the prices of commodities in the last few months has been 
about 10%. 

The sharp falling off in the net earnings of the United States 
Steel Corporation in the last quarter of 1907 show the remarkable 
decline in industry. The net earnings fell from $17,052,211, in Oc- 
tober, to $10,467,253, in November, and to $5,034,531, in December. 
This is a decline of over 70%. 

The unparalleled number of idle cars affords a barometer of our 
industrial condition. Today there are approximately 320,000 freight 
cars and 8,000 locomotives standing idle, representing an invest- 
ment of more than $400,000,000, and there are more than 30,000 
unemployed trainmen. And yet three months ago there were not 
enough railroad cars to move the traffic of the country. 

The money market affords ,one of the best barometers of the 
great change that has come over the industrial situation. From a 
deficit of $54,103,600 on November 23, in the surplus reserves of 
the New York Associated Banks, there was a surplus of $40,626,725 
on February i. From rates of 25% or more, last fall for call money, 
we now have rates of less than 2%. From rates of from 7 to 12% for 
time money last fall, we now have rates of from 4 to 4^ % on Stock 
Exchange collateral, and from 5 to 6% on commercial paper. The 
return of hoarded money and the slackening demand for money in 
industrial and c-ommercial operations are mainly responsible for this 
sudden transformation of the money market. 

Already gold exports have begun from this country. They may 



* This was published in Januar}^, 1908. 



THE CURRENCY PROBLEM 247 

reach a considerable volume before next July. Money rates, how- 
ever, may be expected tO' remain about as at present. Money rates 
are being followed b}^ rising prices for bonds and other secure 
securities. During January the price of bonds rose about twice as 
much as the price of coiTimon stocks. Under existing conditions 
investors find bonds very attractive in view of the uncertainty of 
the situation. Many interior banks have put their idle funds in 
bonds on account of the comparatively high interest return they 
can secure by such a course. 

146, Industrial Effects of the Crisis. 

Returns as to trade and industry in the month ending yesterday* 
are of lessened sales and smaller output as compared with a year 
ago. It is safe to say that estimates of shrinkages of 30 to 50% in 
sales and general turnover are not unreasonable. Iron output will 
probably be 50% below a year ago, though probably larger than in 
December. Shoe shipments are about 30% below January, 1907. 
Lumber and all kinds of building material are very quiet the country 
over. Coke production, though larger than in December, is easily 
50% below the fullest capacity. Coal has been helped by cold 
weather, but is dull ; stocks have accumulated because of the past 
mild weather and of reduced industrial consumption, and there is 
talk of miners of bituminous being asked to take lower wages as 
an alternative to reducing production. There are widespread re- 
ports of large numbers of the ifnemployed in all sections of the 
countr}^, and some southern reports point to a return of idle city 
labor to the farms. 



I. REFORM OF THE CURRENCY. 
147. Do We Need an Elastic Currency? 

BY F. M. TAYLOR. 

I have now shown the existence of variations in the need for 
money. I have shown, secondly, that harm results from these vari- 
ations when not accompanied by corresponding variations in supply. 
It remains to consider whether the presence of an elastic currency 
would prevent or dinninish this harm. It might, at first thought, 
seem that an affirmative answer to this question is already implied 

* January, 1908. 



248 READINGS IN ECONOMIC PROBLEMS 

and demonstrated in the argumient that the harm in question results 
from discrepancy between the money need and the money supply. 
But, as a matter of fact, it is possible to contend that, even if the 
harm results from the inequality of need and supply, the remedy 
cannot be reached by manipulating the supply, but only by alter- 
ing in some way the need. To' borrow an analogy from another 
science, it is one thing to prove that a given poison, administered 
without an antidote, will kill a man, and quite another thing to 
prove that the antidote will save his life. Perhaps the only way to 
save his life is not to give him the poison at all. To' come back to 
our ov/n case, it must be admitted at once that any hope of removing 
altogether the evils we have been considering by the establishment 
O'f an elastic currency is in the highest degree chimerical. The 
changes in the need for money are often symptoms rather than 
causes of disease. To^ secure lasting benefit, the treatment must be 
deeper than any mere monetary reform. It is, however, possible 
to make out a pretty good case for the power of elasticity to miti- 
gate, at least, the evils we have considered. 

Let us begin with "emergency elasticity," the power to expand 
so as tO' meet the extraordinary need of a panic. Of course no one 
expects to increase the circulation rapidly enough fully to satisfy 
the demand which marks the acute stage of a panic. Such ex- 
pansion would, perhaps, be a physical impossibility. What the ad- 
vocates of elasticity do argue is, that if a scheme be provided where- 
by the public can be assured that practically unlimited supplies will 
be forthcoming — that all really urgent needs will be satisfied, then 
the public, thus assured, will immediately cease to feel any extra- 
ordinary need. 

It is hardly necessary to remark that this reasoning has been in 
a high degree confirmed from experience. England, as is well 
known, has furnished three crucial instances in the suspensions of 
the Bank Act in 1847, 1857 and 1866. The success of the device 
on those occasions is almost universally admitted. Again, as is also 
well known, the idea has been repeatedly tested by the United States 
Treasury through the prepayment of interest on the public debt 
and the buying in of bonds. That in several important instances 
these expedients gave great relief can scarcely be questioned. Our 
clearing-house loan certificates also illustrate the application of the 
same idea, and of their great value there can surely be no well 
founded doubt. 

Again, the Imperial Bank of Germany, as is well known, has the 
power of expanding its issue, though under penalty. Since the 
establishment of that bank in 1875, however, there has been no 



THB CURRENCY PROBLEM 249 

opportunity to test thoroughly the efificiency of the elastic limit in 
stopping a panic or in mitigating its evils. But is it not reasonable 
to argue that that very fact is the best possible proof of the efficiency 
of the device? Consider what it means. Twenty years have passed, 
in which the United States has had one crisis of the first magnitude, 
a second of lesser significance, and, besides, a year of great strin- 
gency -and distress. During the same period England has once been 
saved only by the altogether exceptional action of the Rothchilds, 
the Bank of England, and the Bank of France. Yet in all this time, 
Germany has not experienced a monetary disturbance sufficiently 
serious tO' test the new scheme. On the whole, it is difficult to see 
how that scheme could have worked better. 

But again, experience furnishes some ground for the expec- 
tation that elasticit}^ will prove valuable in mitigating the evils of 
those fluctuations in money need which take place in ordinary times. 
The most important of those evils are traceable to the influence of 
excessive or deficient reserves on the rate of discount. The good, 
then, tO' be hoped for from an elastic currency is the prevention of 
any very considerable or sudden fluctuations in the discount rates. 
The reasonableness of this hope is more or less confirmed by the 
experience of various other nations. The case of Canada has re- 
peatedly been cited in recent years. According to all accounts, the 
people of the Dominion have from- experience no knowledge of the 
annual fall stringency with which our business men are painfully 
familiar. But Canada is a small community, and can scarcely fur- 
nish decisive evidence. Somie light, perhaps, may be obtained from 
a comparison of the loan markets of the chief European states. It 
is notorious that, as compared with London, the continental capitals 
maintain great steadiness in rates and are almost entirely free from 
disasterous "squeezes." 

This greater steadiness of the continental markets has been 
commonly explained as due to the insignificant development on the 
Continent of credit operations, the smaller dimensions of the market, 
the insignificant volume of speculation, etc. I doubt whether this 
explanation can any longer hold in a large degree. Certainly both 
France and Germany have experienced during the last twenty years 
great expansion at every point named. Further, so far as the use 
of credit in place of money is concerned, its greater extension in 
London tends to increase the danger of a panic, but does not operate 
to increase the fluctuations of the rates characteristic of ordinary 
times. On the contrary, the extreme elasticity of credit-media 
substitutes for money ought a priori to increase the steadiness of 
rates ; and, conversely, the greater dependence upon actual money 



250 READINGS IN ECONOMIC PROBLEMS 

characteristic of the Continent would be expected to make the state 
of the money reserves more effective to cause fluctuations in the 
rates. Without elasticity, therefore, those markets would be ex- 
pected to show greater fluctuations. Doubtless something is to be 
attributed to the superior management of the continental banks ; 
yet here again it seems natural to argue that their power to furnish 
better management largely depends on the greater elasticity. As is 
well known, the Bank oi England keeps out its whole uncovered 
circulation all the time, and therefore has no power to expand or 
contract, save as it contracts or expands its reserves. The conti- 
nental banks, on the other hand, keep the circulation in constant 
flux, SO' that a change in the volumie of outstanding notes of from 
twenty to thirty millions of dollars in a single week is no uncommon 
occurrence. This is more especially true of the Bank of France. 
It surely is reasonable to argue that this highly elastic condition of 
the circulation is one cause of importance in explaining the superior 
steadiness of the continental markets. 

Finally, as to the matter of protecting the gold reserve of the 
country, is there any reasonable ground for doubting that a thor- 
oughly elastic currency would make this task more easy ? Admitting 
that the inflation of the currency has not been the cause of our 
recent exports of gold, admitting even that it has not in any consid- 
erable degree contributed to that export, still it cannot be seriously 
questioned that a contraction, such as would naturally have taken 
place in an elastic currency, would have done much to check the 
outflow of gold. If only the national bank-notes were genuinely 
elastic, their withdrawal from the country circulation and fromi the 
holdings oi the private and state banks would have made plenty 
of room for the Treasury notes and silver without filling New York's 
reserves to repletion. Or if the Treasury notes were issued on an 
elastic system then as soon as idle money began toi accumulate in 
New York after the panic, the notes would have been returned to 
the Treasury in exchange for low-rate bonds, the reserves would 
have remained at a reasonable level, rates oi discount would have 
been kept somewhere near normal, the Treasury receipts would 
have continued to be in a considerable measure gold, and there 
would not have been any such easily available supply of greenbacks 
with which to work the "endless chain" arrangement. With all 
these conditions established, I venture to afiirm that there would 
have been no gold export sufficient to arouse serious apprehension. 

But, in regard to this matter, we are not dependent on theory 
alone. Experience, also, has shown the efficiency of currency con- 
traction to check a gold movement. A single illustration on this 



THB CURRENCY PROBLEM 251 

point from the recent history of the Bank of England will close 
this article. In the fall of 1892, the Bank found itself called upon 
to stop a gold export. The rate was raised as usual ; but the abun- 
dance of mouey in the city outside made the action of the Bank 
impotent to affect the open market rate. At this juncture, following 
a plan developed in recent years, the Bank began selling consols 
in order to drain off the surplus funds of the market. In the course 
of two weeks, about ten million dollars were absorbed in this way. 
The market quickly responded, the rate rising from about two per 
cent to three. In turn, the establishment of the higher rate was im- 
mediately followed by the practically complete cessation of the gold 
export. That contraction always has worked or always will work 
so well, no one would affirm; but, of its power to do much toward 
attaining the object sought, there is little room for reasonable 
doubt. 

148. What America Can Learn from European Banking. 

BY A. PIATT ANDRe:,W. 

Already the contrast between American and European banking 
organization is beginning to be widely understood, and the arrange- 
ments are being discussed which differentiate banking in Europe 
from banking in America, and which help to explain why the great 
countries of Europe have been so free during the greater part of a 
century from the banking collapses with, which we are still afflicted. 

(i) The banks of all European countries present a much more 
coherent organization than our own. In nO' other country has in- 
dividualism is banking gone so far as in the United States, with its 
25,000 banking institutions, each acting for itself and without any 
organic relation with the rest. In ever}^ other country there is 
some sort of an institution which forms a common bond between 
the banks, which, because of its preponderant capital and resources, 
its relations to the government or its peculiar privileges, is able tO' 
render peculiar services for them and which exerts a controlling 
influence over their activities. It holds their reserves; it clears 
their mutual accounts not only within the same city, but between 
different cities ; it furnishes an ever-ready and unfailing market for 
their best commercial paper, very much as the stock exchanges 
furnish a market for stocks and bonds. When credit expands too 
actively at certain times or in certain places its influence is directed 
to impeding the adA'^ance. If, on the other hand, on account of catas- 
trophes or contingencies which could not have been foreseen, the 
banks in a given locality find themselves in difficulties, it renders 



252 READINGS IN ECONOMIC PROBLEMS 

assistance until the strain is relaxed and confidence restored. In 
every case they perform an important fimction in providing at all 
times facilities for the exchange of money and credit between differ- 
ent localities, thus rendering impossible such cessations of domestic 
exchange as are frequently witnessed in the United States. In every 
case they serve as depositories for the greater part of the reserves 
of the banks, thus economizing and rendering effective the other- 
wise idle cash of the individual banks in the same way that those 
individual banks render active and eff'ective the cash which would 
otherwise lie idle and useless in the pockets or safes of their cus- 
tomers. By thus furnishing an immense reservoir of available 
money these European institutions provide their communities with 
vast resources of lending power to which resort can be made in 
moments of pressure or disturbance. Finally, these institutions, 
through the practice of rediscount, furnish to the banks an agency 
for making available in times O'f need those sterling assets in the 
form of first-class commercial paper, which in the United States at 
such times can find no market and can only be translated into cash 
when they mature. 

(2) In the general treatment of reserves the banking arrange- 
ments of European countries differ fundamentally from, our own. 
Their reserves are far more available, mobile and alive. Our national 
banking law differs from the banking laws of all other countries in 
requiring a proportionate minimum of cash to be held in useless and 
inviolate idleness against all deposits. This rigid and unreasonable 
requirement has been copied in greater or less degree in the bank- 
ing laws of our states, but it has no counterpart elsewhere in the 
world. It fixes an uncompromising limit to the expansion of loans 
and discounts, prevents the banks from extending their credit when 
it is most needed and desei'ved, and sO' inhibits the reserves of the 
banks from really serving as reserves. The reserves of European 
banks are much more effective than our own, however, for the 
further reason, to which allusion has already been made, that in 
European countries most oi the cash aside from the till money is 
left in the custody of the central institution, and can therefore be 
better administered to serve the fluctuating demands of particular 
seasons and different localities than it possibly could be when in 
the custody of thousands of separate firms. Moreover, as the banks 
in those countries are accustomed to- consider the balances held 
for them by their central institutions as equivalent tO' cash actually 
held in their own vaults, when a bank requires larger reserves be- 
cause of increasinsf credit demands it can easilv effect such increases 



THE CURRENCY PROBLEM 253 

by transferring to the central institution some of its commercial 
paper or bills receivable in exchange for an increased balance upon 
the books of the central institution. The reserves of European 
banks are thus peculiarly mobile, not only because the law pre- 
scribes no rigid minimum, but because they are consolidated, and 
above all because the banks are able at any time within reasonable 
limits to transform any solvent assets into available reserve funds. 

(3) Another respect in which the drift of the world's banking 
legislation has been in a different direction from that of this country 
concerns the matter of note issue. The tendency of note issue regu- 
lations in every other country is toward concentration in its con- 
trol. In France the Bank of France for more than sixty years 
has been the sole note-issuing institution; in England the Bank of 
England has for decades issued all but a fraction of one per cent of 
the outstanding notes ; in German}^ there remain only four note- 
issuing banks aside from the Reichsbank ; while within quite recent 
years in Italy, Switzerland, Sweden, and Japan the note issue priv- 
ilege has likewise tended toi be placed in the hands of a single insti- 
tution. The importance of the question of note issue has, doubt- 
less, been much exaggerated in most countries and with the modern 
development of deposit banking and the greatly preponderant use 
of checks in making payments, the question of the proper regulation 
of the issue privilege, which was formerly the principal problem in 
banking legislation, bas ceased to have the importance which it used 
to command. Nevertheless, the coincidence of the world's experi- 
ence in the treatment of note issues is too complete to be accidental 
and without significance. It seems to suggest that concentration in 
note control offers better opportunities than decentralized control 
for adaptation of currency supply to currency demand, for strong 
control over credit expansion, and for wise and immediate relief 
in times of emergency or unsettlement. 

It would, of course, be preposterous to suppose that we in Amer- 
ica can solve our banking problem in the same way that any other 
country has solved it. It would be equally unreasonable in seeking 
a solution for our own difficulties to overlook those arrangements 
which belong to the banking systems of all other countries and 
which are absent from our own. In view of our continued prone- 
ness to financial troubles and the striking contrast of Europe's long- 
standing immunity f ro^m them, it is only reasonable that we should 
carefully examine such features as are common to^ the banking sys- 
tems of all other countries and as we lack, and that we should con- 
sider the possibility of devising a plan for equipping our own bank- 



254 READINGS IN BCONOMIC PROBLEMS 

ing system with the most vahnable of these features. In doing so 
we are only limited by the consideration that any proposed changes 
must be thoroughly consistent with, and must naturally grow out 
of, our own peculiar traditions and conditions. 

149. Currency Reform and Concentration of Credit. 

BY the; PUJO COMMITTET!;. 

We are not unmindful of the important and valuable part that 
the gentlemen who dominate this inner group and their allies have 
played in the development of our prosperity. There should be no 
dispositioin to hamper their activities if a situation can be brought 
about where their capital, prestige, and connections can be inde- 
pendently employed in free and open competition. Without the 
aid of their invaluable enterprise and initiative and their credit and 
financial power the money requirements of our vast ventures could 
not have been financed in the past, and mudi less so in the future. 

It is also recognized that co-operation between them is fre- 
quently valuable, and often essential tO' the public interest as well 
as their own, in order to permit of the furnishing or guaranteeing 
of the requirements of our vast enterprises of the present day and 
O'f the still larger ones that are probably in store for us. 

But these considerations do not involve their taking control of 
the resources of our financial institutions or of the savings of the 
people in our life insurance companies nor that they shall be able 
to levy tribute upon every large enterprise ; nor that commercial 
credits or stock exchange markets and values shall wait upon their 
beck and call. Other countries finance enterprises quite as important 
as our own without employing these methods. 

Far more dangerous than all that has happened tO' us in the past 
in the way of elimination of competition in industry is the control of 
credit through the domination of these groups over our banks and 
industries. It means that there can be no hope of revived competi- 
tion and no new ventures on a scale commensurate with the needs of 
modern commerce or that could live against existing combinations, 
without the consent of those who' dominate these sources of credit. 
A banking house that has organized a great industrial or railway 
combination, or that has offerd its securities to the public, is repre- 
sented on the board of directors and acts as its fiscal agent, thereby 
assumes a certain guardianship over the corporation. In the ratio 
in which that corporation succeeds or fails the prestige of the bank- 
ing house and its capacity for absorbing and distributing future 



THE CURRENCY PROBLEM 255 

issues of securities is affected. If competition is threatened it is 
manifestly the duty oi the bankers from their point of view of the 
protection of the stockholders, as distinguished from the standpoint 
of the public, to prevent it if possible. If they control the sources 
of credit they can furnish such protection. It is this element in the 
situation that unless checked is likely to do more to prevent the 
restoration of competition than all other conditions combined. This 
power standing- between the trusts and the economic forces of com- 
petition is the factor most to be dreaded and guarded against by 
the advocates of revived competition. 

Mr. Morgan was unable to name an instance in the past 10 
years in which there had been any railroad building in competition 
with any of the existing systems. He attributed it to the restrictions 
of the Interstate Commerce Commission. The fact is, however, as 
we all know, that railroad construction is constantly being prose- 
cuted — necessarily so with out rapidly growing population — but 
that instead of being done independently as foniierly it is now 
done by the great systemis. 

It is impossible that there should be competition, with all the 
facilities for raising money or selling large issues of bonds in the 
hands of these few bankers and their partners and allies, who^ to- 
gether dominate the financial policies of most of the existing systems. 
There never will be, until this combination or community of inter- 
est can be dissolved by either closing to them the vaults of the banks, 
life insurance companies, and other trustees of other people's money, 
or by opening them to meritorious competing enterprises. 

Mr. Baker, when upon the witness stand, was unable tO' name a 
single issue of as much as $10,000,000 of any security, either in the 
railroad or industrial world, that had been made within 10 years 
without the participation or co-operation of one of the members 
of this small group. He subsequently wrote naming only the case 
of a single issue of $13,500,000. It was proved as to this instance 
by the notice issued to stockholders that Morgan & Co. were in fact 
largely interested and received a part of the profits from the issue. 
Yet it appears that within six years the joint account transactions 
of that group in public issues alone amounted to over three billion 
dollars, of which a $10,000,000 issue would have been less than 
one-third of one per cent. 

Issues of securities of local or small enterprises requiring moder- 
ate sums of money are frequently financed without the co-operation 
of these gentlemen; but from what we have learned of existing 
conditions in finance and of the vast ramifications of this group 



256 READINGS IN ECONOMIC PROBLEMS 

throughout the country and in foreign countries we are satisfied 
that their influence is sufficiently potent to prevent the financing of 
any enterprise in any part of the country requiring $10,000,000 or 
over, of which for reasons satisfactory to themselves they do not 
approve. Therein lies the peril of this money power tO' our progress, 
far greater than the con:ybined danger of all existing combinations. 
The latter may at last fall of their own weight, especially if de- 
prived of the protection and support against competition referred 
to, or they may be disintegrated as unlawful. 

The men who established our great industries have added to 
the prO'Sperity of the country during the period of the upbuilding 
of these industries ; but they none the less violated the law when they 
reversed the processes under which the country had grown and 
prospered by combining to throttle the competition upon which they 
had thrived. Whilst they were struggling against one another for 
supremacy they were a valuable asset to the country; since they 
have pursued the opposite policy they have become a menace. 

The gentlemen constituting this inner circle have, however, vio- 
lated no law in what they have done, so far as we are able to gather ; 
but that is rather because of the loose, intangible character of this 
recently developed community of interests and because the law as yet 
has not properly safeguarded the community against this form oif 
control. 

The acts of this inner group, as here described, have nevertheless 
been more destructive of competition than anything accomplished 
by the trusts, for they strike at the verj^ vitals of potential compe- 
tition in every industry that is under their protection, a condition 
which, if permitted to continue, will render impossible all attempts 
to restore normal competitive conditions in the industrial world. 

It accordingly behooves us to see to it that the bankers who^ re- 
quire and are bidding for the money held by our banks, trust com- 
panies, and life insurance companies to use in their ventures are not 
permitted to control and utilize these funds as though they were 
their own. 

If the arteries of credit, now clogged well-nigh to chocking by 
the obstructions created through the control of these groups, are 
opened so that they may be permitted freely to play their important 
part in the financial system, competition in large enterprises will be- 
come possible and business can be conducted on its merits instead 
Oif being subject to the tribute and the good will of this handful of 
self-constituted trustees of the national prosperity. 



THE CURRENCY PROBLEM 257 

150. The Defects in the Present Banking System. 

EY THE NATIONAL MONETARY COMMISSION. 

The principal defects in our banking system we believe may be 
smiimarized as follows : 

1. We have vco provision for the concentration of the cash re- 
serves of the banks and for their mobilization and use wherever 
needed in times of trouble. Experience has shown that the scat- 
tered cash reserves of our banks are inadequate for purposes O'f as- 
sistance or defense at such times. 

2. Antiquated Federal and State laws restrict the use of bank 
reserves and prohibit the lending power of banks at times when, 
in the presence of unusual demands, reserves should be freely used 
and credit liberally extended to all deserving customers. 

3. Our banks also lack adequate means available for use at any 
time to replenish their reserves or increase their loaning powers 
when necessary to meet normal or unusual demands. 

4. Of our various forms of currency the bank-note issue is the 
only one which we might expect to respond to the changing needs 
of business by automatic expansion and contraction, but this issue 
is deprived of all such qualities by the fact that its volume is largely 
dependent upon the amount and price of United States bonds. 

5. We lack means to insure such effective co-operation on the 
part of banks as is necessary tO' protect their own and the public 
interests in times of stress or crisis. There is no co-operation of 
any kind among banks outside the clearing-house cities. While 
clearing-house organizations of banks have been able to render valu- 
able services within a limited sphere for local communities, the lack 
of means to secure their co-operation or affiliation in broader fields 
makes it impossible to use these or similar local agencies to prevent 
panics or avert calamitous disturbances affecting the country at 
large. These organizations have, in fact, never been able to pre- 
vent the suspension oi cash payments by financial institutions in 
their own localities in cases of emergency. 

6. We have no effective agency covering the entire country 
which affords necessary facilities for making domestic exchanges 
between different localities and sections, or which can prevent dis- 
astrous disruption of all such exchanges in times of serious trouble. 

7. We have no instrumentality that can deal effectively with the 
broad questions which, from an international standpoint, affect the 
credit and status of the United States as one of the great financial 
powers of the world. In times of threatened trouble or of actual 
panic these questions, which involve the course of foreign exchange 



258 READINGS IN BCONOMIC PROBLEMS 

and the international movements oi gold, are even more important 
to us from a national than from an international standpoint. 

8. The lack of commercial paper of an established standard, 
issued for agricultural, industrial, and commercial purposes, avail- 
able for investments by banks, leads toi an unhealthy congestion of 
loanable funds in great centers and hinders the development of the 
productive forces of the country. 

9. The narrow character of our discount market, with its lim- 
ited range of safe and profitable investments for banks, results in 
sending the surplus money of all sections, in excess of reserves and 
local demands, to New York, where it is usually loaned out on call 
on Stock Exchange securities, tending to promote dangerous specu- 
lation and inevitably leading to injurious disturbances in reserves. 
This concentration of surplus money and available funds in New 
York imposes upon the managers oi the banks of that city the vast 
responsibilities which are inherent in the control of a large propor- 
tion of the banking resources of the country. 

10. The absence of a broad discount market in our system^ 
taken together with the restrictive treatment of reserves, creates, at 
times when serious financial disturbances are anticipated, a condition 
of dependence on the part of individual banks throughout the coun- 
try, and at the same time places the farmers and others engaged 
in productive industries at a great disadvantage in securing the 
credit they require for the growth, retention, and distribution of 
their products. 

IT. There is a marked lack of equality in credit facilities be- 
tween difi^erent sections of the country, reflected in less favored 
communities, in retarded development, and great disparity in rates 
of discount. 

12. Our system lacks an agency whose influence can be made 
eft"ective in securing greater unifomiity, steadiness and unreason- 
ableness of rates of discount in all parts of the country. 

13. We have no effective agency that can surely provide ade- 
quate banking facilities for different regions promptly and on 
reasonable terms to meet the ordinary or unusual demands for 
credit or currency necessary for moving crops or for other legiti- 
mate purposes. 

14. We have nO' power tO' enforce the adoption of uniform 
standards with regard to capital, reserves, examinations and the 
character and publicity of reports of all banks in the different sec- 
tions of the country. 

15. We have no American banking institutions in foreign coun- 



THB CURRENCY PROBLBM 259 

tries. The organization of such banks is necessary for the develp- 
ment of our foreign trade. 

16. The provision that national banks shall not make loans 
upon real estate restricts their power to serve farmers and other 
borrowers in rural communities. 

17. The provision of law under which the Government acts as 
custodian of its own funds results in irregular withdrawals of money 
from circulation and bank reserves in periods of excessive Govern- 
ment revenues, and in the return of these funds into circulation 
only in periods of deficient revenues. Recent efforts to modify the 
Independent Treasury system by a partial distribution of the public 
moneys among national banks have resulted, it is charged, in dis- 
crimination and favoritism in the treatment of different banks. 

There is a general agreement among intelligent students of the 
subject that to remedy these and other defects it is necessary to 
provide a comprehensive reorganization of credit and a thorough 
reconstruction of our banking systems and methods. 



J. AGRICULTURAL CREDIT. 
151. The High Cost of Farming. 

BY B. F. YOAKUM. 

All economists agree that today, in this country as well as in every 
other country where civilization has become complex, the greatest 
problem before the administration and the greatest task before the 
individual is to stop the long-continued rise in the co'St of living. 
Food and clothing, the fundamentals of life, cost more and more 
each year. Men who^ a few years ago were relatively prosperous on 
limited incomes find themselves today unable to maintain even the 
decencies, let alone the luxuries, of modern life. 

Of all the causes of the high cost of living that have come di- 
rectly under my observation and that have forced themselves into 
my problems as a railroad man, the paramount cause is the excessive 
burden of interest charges laid upon the agricultural producers of 
the country because of inadequate money-lending facilities in this 
country. 

Cheaper money for the farmer is the first of our agricultural 
problems. When you come to talk of agricultural borrowing, you 
have to come down to talk in terms of the "one-bale farm." The 
farm of 80 to 160 acres, tilled and worked to its limit, is the real 
agricultural unit. Therefore, the fundamental question in farm 



26o READINGS IN ECONOMIC PROBLEMS 

money is the question whether the individual farmer, owning and 
operating his own land, is supplied with capital at reasonable rates 
or whether he is stinted in capital and gouged in his interest account. 
Let us get down to figures taken from the best data available. 
They have been made by drawing upon the government census re- 
ports covering property operated by its owners, and by collecting 
opinions from the well informed. By my estimate, prepared in this 
way, the American farmer is indebted today in these amounts : 

Farm mortgages on land operated by owners — United States 

Census figures $1,726,000,000. 

Mortgages on tenant farms, at same rate per acre as above, 

estimates 1,320,000,000. 

Average amount of current loans to farmers, on account of 

crops, chattels, etc 3,000,000,000. 

$6,046,000,000. 

This estimate shows that the farmer's debt is about half on ac- 
count of fixed capital — mostly mortgage loans — and half on account 
of current loans. The total number of farms in the country is 
about 6,000,000. Therefore, the average farm has a mortgage debt 
of $500 and a current debt of about the same amount outstanding 
against it. 

The rate of interest paid on this tremendous volume of borrowed 
capital is, according to the best estimates I can find, between 8 and 9 
per cent per annum,. The actual rate of interest itself is only a 
part of the burden of borrowing. To it must be added the constant 
drain of renewals for mortgages on farms, of loans, fees for record- 
ing mortgages, and other loans to farmers, most of whic'h are made 
on short term, and commission fees and compulsory insurance on re- 
newals. Fromi all I have been able to gather from the best available 
sources, I estimate, that an average rate paid by our farmers is 8^ 
per cent per annum, which is a conservative estimate of the full 
cost paid on farm money used in the financing and capitalization of 
the farms of the United States. 

The annual interest bill, therefore, paid by the farmers, is about 
$510,000,000. The total value of the wheat crop of the United 
States as of December i, 191 1, farm value, was $543,000,000. Prac- 
tically, the interest account of the fanners ate up the total wheat 
crop of the entire country. 

Let us see by comparison with other borrowing rates in thfs 
country if a discrepancy may be observed. In normal times, it is 
only a decrepit or unsound sort of factory that has tO' pay such a 
rate as that for money. Manufacturers usually borrow, for capital 



THB CURRBNCY PRO BLUM 261 

account, on long term bonds and mortgage, and if the times are 
right the average fairly successful manufacturing company can get 
its needed capital at a gross rate around 6 per cent. The companies 
manufacturing for farmers' consumption raise what money they 
need at not much more than 5 per cent per annum. 

The manufacturer borrows against his piles of textile goods, of 
copper ingots, of steel bars, of hmiber stored at the saw mills, and 
almost any sort of manufactured products, at a rate not much more 
than half the rate charged against the farmer, with his best of col- 
lateral in the shape of wheat, corn, cotton and other products. 

No thinking man, looking the facts fairly in the face, believes 
that the rate to- the farmers is a just and reasonable interest rate. 
He pays far too much, both for the money he gets on mortgage 
and for the money he borrows to malce his crop. He has the finest 
security for current loans there is in the world, namely, products 
that go into immediate consumption and that sell, in all the markets 
of the world, every hour of the day ; yet he pays a rate double the 
rate paid by manufacturers of industrial products that have to be 
marketed with great skill, often on a treacherous and delicate 
market. No one contends that a thousand dollars' worth of women's 
dress goods is as good collateral, fro-m a standpoint of market- 
ability, solidity of value, or freedom from depreciation, as an equal 
value in wheat, or corn, or cotton. The only reason is that the bor- 
rower in the one case is a merchant or a manufacturer — a member 
of an organized trade — while the borrower in the other case is a 
farmer, a man who works by himself and buys and sells and bor- 
rows on his own hook, under an unorganized custom. 

We take it for granted that in productive power, in character, 
and in ability, the American farmers, as a class, are equal to the 
farmers of any other land. Broadly speaking, therefore, there is no 
good economic reason why, having equal assets and equal character, 
they s'bould not borrow on mortgage and growing crops at as good 
a rate of interest as the fanners of any other country in the world. 

Having this premise in mind, let us discover what the farmers 
of other countries, as advanced in civilization as the United States, 
pay for their money borrowed on mortgage and for their temporary 
demands. 

Germany is, in a sense, an agricultural nation. A generation 
ago, the German farmer was a very poor man, perhaps next, as a 
class, in the scale of poverty, to the men who live in the city slums. 
Nowadays, on the contrary, the small German farmer is a prosperous 
citizen, with money in the bank, and with ample credit to carry on 
all the activities of which he is capable. We find that he borrows 



262 READINGS IN ECONOMIC PROBLEMS 

from an association of land credit, organized under its class name, 
Landschaften, or Ritterschaften. Under these systems the farmers, 
in a certain territory, form^ into- co-operative societies, syndicating 
their farm lands under negotiable bonds which are offered jointly 
as security for the credit they need. The individual then borrows 
from this co-operative society. It is just as though all the small 
farms in a Texas county, nO' one of which is more than i6o acres^ 
were pooled into one great society which borrowed on a single bond 
against all this property, and then lent to- any individual farmers 
forming this pool as they needed money on mortgage. These Ger- 
man farmers obtain the money that they need on mortgage at a rate 
never exceeding 5 per cent gross and averaging around 4.40 per 
cent. 

In Paris, there is a great institution called the Credit Foncier, 
which really makes the rate on farm mortgage loans in France. The 
society started with Government support, but has not since needed 
Government help, and, up to the present time, the loans to the people 
have totaled more than twO' billion dollars. The amount lent by this 
society is generally one-half of the appraised valuation. The in- 
terest rate varies but is always less than 5 per cent. At the present 
time it is 4.30 per cent. In other words the French farmers are get- 
ting money at one-half the rate of interest the American farmer 
pays. The loans, moreover, are made from ten to seventy-five years, 
and are retired in very small installments year by year. If a farmer 
prefers, however, he miay boTrow on short time loans running froan ' 
one to nine years without paying off any of the principal year by 
year. If a farmer wishes to build on his land, he can obtain 
through the Credit Foncier a mortgage credit based on the value 
of the land and the building to be put up. This is temporary ac- 
commodation, and when the building is completed, its cost can be 
added to the loan. 

It would be possible to adduce a dozen other similar systems ; but 
these two stand out so- prominently in any study of mortgage lend- 
ing institutions that it is enough to cite their records and their ac- 
complishments and consider them as illustrations of maximum 
efficiency and minimum cost in providing mortgage money to a 
farming nation. It will be observed that the money in the German 
system is raised by making a bond on the joint assets of all the 
farmers in a certain community. In the French system, the money 
is raised from the people by issuing the bonds of the Credit Foncier 
itself in convenient units for private investment, with the result that 
the investors of France supply an abundant flood of permanent cap- 
ital to the farmers. These two^ systems, while different in detail, are 



THE CURRENCY PROBLEM 263 

similar in principle. They give to- the individual investor the power 
to buy a divided interest in a mortgage on the best security in the 
country, namely, the producing farm. In France this sound and 
sensible principle has done more perhaps than any one factor to 
raake the whole nation a nation oi investors. The loans of the 
Credit Foncier are always oversubscribed by the public. 

Having glanced at these two monumental examples of efficiency 
in lending on farm mortgage, I pass on to consider the other branch 
of farm financing, namely, the borrowing of money against current 
needs, to plant the fields, to- buy equipment, tO' start the farm, to 
harvest the crops, and tO' carry the crops when harvested. These 
necessary and inevitable functions of farm; life recpire an average 
of three billion dollars of current loans to American farmers year 
by year. We have estimated an average rate of 8^^ per cent as the 
rate paid by American farmers for this accommodation. Let us see 
what is the average rate paid by German, French and Italian farmers 
for the same accoinmodation. 

In working out the answer to- this cpiestion, one encounters in 
Germany, France and Italy, as well as in other countries on a similar 
scale, one of the most interesting and illuminating records that can 
be conceived. It is the story of the rural banks, so-called. In the 
German Empire, in 1909, under the purely rural system, about 
12,000 little country banks did a business of approximately 
$1,634,000,000 at an average interest rate of less than 5 per cent, 
A very large part of this lending was done on current account, much 
of it without any security except the promise to pay. That is the 
concrete statement of the business as it exists today. 

This Raififeisen system was not evolved in a day. It has been a 
system of slow and steady" growth. It had its inception in pressing 
needs of a scattered agricultural population and it has developed 
as years have passed, until today it can probably be cited as the most 
complete and efficient system known in the world for the supplying 
of current funds to the greatest producing element in the country. 
It is more than sixty years since it was founded, and in that time 
there has not been a single instance of a failure of a Raififeisen bank. 
It is worth while, therefore, to summarize the story oi the Raififeisen 
banks from their beginning. 

In the middle of the last century, the agricultural regions of 
Germany had fallen into a most deplorable condition. The lending 
of money to the argiculturists had been taken almost entirely into 
the hands of usurers. Inevitably agriculture languished under this 
tremendous tax. Thousands of rich little farms passed out of the 
hands of their former owners under foreclosure of burdensome 



264 READINGS IN ECONOMIC PROBLEMS 

debts. Famine followed very naturally. In 1847, '^^ one of the 
little peasant villages of the Rhine Valley, the new! order of things 
began. A man named Frederick Raiffeisen, the mayor of several 
villages, stepped in to call a halt to usury. At first, he merely took 
his stand in the market place and traded for the account of his peo- 
ple with the middlemen who^ would despoil them. Later on, he took 
more practical steps. The first was to found a little organization oi 
the wealthier men, who bought up cattle and stores and sold them, 
at fair profits, to the people. From that the next step was easy. It 
was taken fourteen years after the first intervention. 

At Anhausen, Raiffeisen founded a society in which the farmers 
themselves supplied the money, whidh, in turn, was lent out at rea- 
sonable rates to the people who jieeded it. From that little begin- 
ning the spread O'f the Raiffeisen banl<;ing system across the conti- 
nent of Europe was one of the marvels of banking history. 

At the present time, there is a Federation of German Agricul- 
tural Societies, numbering more than 19,000 farmers' banks, and in- 
cluding in its membership more than 1,750,000 farmers. It is an 
agricultural mone}^ trust, the object of which is to see tO' it that the 
farmer gets his money when he needs it and at rates that are com- 
mensurate with his security. 

Germany was not alone in using this system. Italy followed with- 
in a very few years of the opening of the first Raiffeisen Bank of 
Anhausen. Switzerland and Belgium took the central idea of coop- 
eration, but worked it somewhat differently. Ireland, India, Eng- 
land, and Denmark have studied these same matters and adopted 
so much of the principle and practice of the cooperative agricultural 
bank as is needed. Still later, indeed within the very recent past, 
Quebec and Massachusetts have carried on small experiments along 
the same lines, but with slight success so far. 

We have found the one cardinal fact that we set out to find. 
We have discovered that the German, the French, the Italian, the 
Irish, the Danis'h, and even the Egyptian and Hindoostanee farmer 
borrows on current account against his crops, his equipm'ent, and 
even his chattels at a rate of interest 5 per cent per annum or 
less. The American farmer, on the contrary, pays an average of 
8^ per cent, while in some of our newer states the average will run 
to more than 10 per cent. 

Let us turn back now, and complete the summary with which 
we started out. We find the American farmer borrowing 6 Billion 
Dollars at an average rate of 8^4 per cent and paying an interest 
bill every year of 510 Million Dollars. We find the farmers of 
other lands where agricultural credit is organized pledging the same 



THE CURRENCY PROBLEM 265 

sort of assets under similar loans and paying an average of less 
than 5 per cent. For the sake O'f rounding out the argument on 
a conservative basis, let us take 5 per cent as the basis. The differ- 
ence between 5 per cent and 8}^ per cent on 6 Billion Dollars is 
210 Million Dollars a year. That is the undue interest tax paid 
every year by the American farmer because he has no organized 
machinery to supply him with the capital he needs and nO' encour- 
agement from the Government at Washington, D. C. 

I do not say that any credit system can be adopted and put into 
immediate operation which would save 200 Million Dollars a year 
to the farmers of this nation. What I do say is that the develop- 
ment of our American agricultural sections, more particularly of 
our Southwest — naturally a land of small farms and intensive 
growth — cannot reach its full strength or work out to anything 
approximating its final destiny until such time as there has been 
provided a new system of farmi finance that will give tO' the small 
farmer ample opportunity to borrow on a business basis both against 
his farm and against his crops and other current assets. 

152. Agricultural Credit in the United States. 

BY E. W. KEMMERE^R. 

If the time is ripe for a greater use of bank credit in agriculture, 
how is that credit tO' be obtained? Broadly speaking four methods 
may be mentioned, only the last two of which are deserving of much 
attention at the present time. They are: (i) Establish govern- 
ment agricultural banks; (2) Adopt the Egyptian plan of a gov- 
ernment guaranty to an agricultural bank established with private 
capital; (3) Encourage the farmers to organize cooperative credit 
societies on some such plan as the Raiffeisen or Schulze-Delitzsch 
banks of Germany; (4) Utilize more effectively in the interest of 
the farmer our present banking machinery, and improve it where 
it is defective. 

Although the success of cooperative banks has been great in 
nearly every country of Continental Europe nowhere else has it 
been so great as in Germany, the country of their origin, and it is 
to Germany one naturally turns first for suggestions. There we 
find four types of cooperative credit banks, Landschaften, Ritter- 
schaften, Schulze-Delitzsch banks, and Raiffeisen banks. The first 
two are cooperative associations loaning money on land mortgages. 
The other two types of banks deal especially with short-time credit, 
the one chiefly in the towns and cities, and the other with farmers 



266 READINGS IN ECONOMIC PROBLEMS 

in the rural communities. It is with the latter that we are most 
concerned. Let us therefore consider briefly the essential features 
of the Raiffeisen system. 

These features are: 

(i) Organization on the strictly cooperative principle, none 
but members having the right to borrow, although non-members 
may enter deposits. 

(2) Limitation O'f loan operations to a very small area in which 
all farmers are acquainted with each other. The banks were tO' be, 
therefore, purely neighborhood affairs. 

(3) Unlimited liability of all members for the debts of the 
bank, a necessary corollary of which is the provision that member- 
ship is obtained only by election by those already members. 

(4) The working capital of the bank is obtained chiefly from 
the following sources: (a) Small savings "drawn, either from 
within the area covered by the bank, in which case it comes both 
from members and non-members, the former being rewarded where 
possible at slightly higher rates in order to encourage member- 
ship; or from without the area, in which case it of necessity comes 
from non-members." (b) Loans from the provincial bank of the 
district, or more importantly from the central bank of the Empire, 
at which the local bank keeps a current account and with which it 
may rediscount its paper. (c) A purely nominal share capital 
which the banks did not originally have, and which they have been 
forced against their will to issue. The requirement is now usually 
met by the issue of a few low-priced shares of which no miember 
can hold more than one and upon which no dividend is paid, (d) 
Two surplus funds called reserve funds; one used exclusively to 
cover losses, and the other being the principal reserve fund, com^ 
monly used for "positive improvements." In this fund m.ust be 
placed two-thirds of the annual profits. The fund cannot be dis- 
tributed among the members, even though the bank be dissolved. 
In such a case it is held in trust for a time for a new bank, should 
one be established, and if no such bank is established it must be 
used for some work of public utility. 

(5) A fifth feature of the Raiffeisen system is that the bank's 
administrative organization is simple and democratic. Final author- 
ity on local questions resides in the general meeting in which every 
member has one vote. There is elected annually a committee of 
management consisting usually of five or six directors who meet 
weekly. As a check upon this executive committee there is also 
elected annually a council of supervision of from six to nine mem- 
bers. A biennial audit is made of the accounts of each bank by an 



THE CURRENCY PROBLEM 267 

accountant employed by the district or central union. The books 
of the bank, except the individual deposit ledger, are open to- the 
inspection of all members. Officers of the local banks serve with- 
out compensation, except the treasurer who has no vote in the mak- 
ing of loans. 

(6) Advances take two forms: the ordinary loan and the cur- 
rent account. The period of the ordinary loan varies from six 
months to three years. Loans are repayable in instalments cover- 
ing interest and part of the principal, or in lump sums. Banks re- 
serve the right tO' call a loan on four weeks' notice. The average 
credit advanced per member is 500 marks, and the average interest 
rate probably somewhere between four and five per cent. Although 
mortgage and other collateral security is sometimes accepted, the 
banks' chief reliance is personal security, and the great bulk of the 
loans are made on two-name paper. 

The Raiffeisen banks are organized into provincial federations 
with provincial banks at their head, and these in turn into a national 
federation with a central bank at its head. These provincial banks 
and the central bank "equalize the need of credit of the individual 
banks, supplying them with money when required and employing 
their surplus funds." A large proportion of the German coopera- 
tive banks and other cooperative agricultural societies are federated 
in a single national oirganization. 

Such are the leading features O'f the greatest agricultural credit 
system of the world. To the American the surprising thing about 
it all is that such cooperative credit banks are practically unknown 
in the United States. What is needed now is a campaign of educa- 
tion among the farmers themiselves rather than one of legislation ; 
although the development of such societies will doubtless be fur- 
thered in many states by legislation, such as was recently enacted 
in Massachusetts, freeing them from some of the hampering pro- 
visions of the general banking act of the state. Conditions are so 
widely different in different sections of the country, and among 
different classes in the same section, that cooperative agricultural 
credit societies will need to be given a fairly free hand in such mat- 
ters as limited or unlimited liability, the amount of share capital, 
receipt of deposits, etc., so that they may adapt themselves to local 
needs. A reasonable amount of government supervision on the part 
of the banking departments of the states seems desirable. 

Passing now to the question of the better utilization of our 
existing banking machinery, we may consider it first from the 
standpoint of the government, then from that of the banks, and 
finally from that of the farmers themselves. 



268 READINGS IN ECONOMIC PROBLEMS 

The provisions of the national banking act are too rigid in the 
matter of loans on real estate security. National banks are, of 
course, intended to be banks for business men, and their assets 
should be quick assets in so far as their liabilities are quick liabili- 
ties. But it should not be overlooked that the modern farmer is a 
business man, that he needs active credit for the efficient conduct 
of his current business, and that land is the only kind of collateral 
many farmers can give that is acceptable to bankers. Many worthy 
farmers are not willing and some are not able tO' secure satisfactory 
endorsers to their paper. The ability of the farmer to give mort- 
gage security tO' national banks in case of need would often prove 
a great help. Furthermore, now that a majority of our national 
banks have savings departmients, and that savings deposits, might 
wisely be made withdrawable subject to advance notice, it is not 
unreasonable that these banks should be permitted to invest at least 
a substantial part of their savings funds in the same kinds of mort- 
gage securities that are open to the investment of funds of savings 
banks. 

Another form of desirable legislation consists in the abandon- 
ment of our unscientific bond secured bank-note circulation for a 
scientific system, and in the rendering of our deposit ctirrency more 
elastic. The more the fanner resorts tO' bank credit as a means of 
financing his current business the more will he suffer from the sea- 
sonal inelasticity of our bank-note and deposit currency. Farming 
business is preeminently seasonal in character; the farmers over 
the greater part of the country need funds most at about the same 
times of the year, i. e., the fall and spring. A great increase in the 
demand for currency and capital, say in the fall, under an inelastic 
currency and credit system like our O'wn, means to the farmer, 
highest interest rates at just the time when he needs most to bor- 
row, greatest scarcity of cash at just the time when his need for 
cash is the most urgent, and prices depressed by a tight money 
market at the time of the year when he has most to sell. It is doubt- 
ful if any class of people in the country would benefit more from a 
thoroughgoing reform' of our banking system than would the 
farmers. 

The banker must be brought tO' realize that one of the best kinds 
of paper in the world is short-time business paper bearing the names 
of two responsible farmers. He should be an adviser and friend to 
the farmer as much as to the city customer. He should make the 
farmer feel that a productive loan to him is not oi the nature of a 
favor reluctantly granted — as so many farmers complain — but 
rather a business proposition profitable to both,^as gladly given as 



THB CURRENCY PROBLEM 269 

it is received. He should further cooperate with the local business 
men in preparing financial ratings of farmers, to fill the gap left 
by the inability of mercantile credit agencies to rate farmers as 
extensively as they do other business men of like capital. 

■ The farmer, on the other hand, must be educated by the banker, 
the press, and the agricultural school and college, to the advantages 
of credit as a means to the more efficient working of his farm. This 
should be done with caution for credit is a two-edged sword. The 
farmer should be encouraged tO' borrow only when it is very clear 
that he can use additional capital so productively that it will pay. 
But v/hat industrious farmer could not use profitably some addi- 
tional capital every year, could he obtain it at as reasonable rates 
as does the inerchant? The farmer must learn to keep careful ac- 
counts. He miist be made to realize that the banks are open to him 
as to other business men, and that the bulk of the country's short- 
time commercial loans, as likewise of the agricultural loans of Eu- 
rope, are made on the very same security he is capable of giving, 
i. e., two-name paper of honest, industrious business men. 



VI. 

THE PROBLEM OF RAILROAD RATES AND 
REGULATION. 



A. THE FUNDAMENTAL FACTORS IN THE RAILROAD 

PROBLEM. 

153. The Extent of American Railway Interests. 

BY I. IvEO SHARFMAN. 

A discussion of the problems of railway regulation in the United 
States may well begin with a statement of the extent of the railway 
interests to be regulated. Some conception may be obtained of the 
magnitude of these railway interests by a consideration of the 
extent of mileage, the amO'Unt of equipment, the number of employ- 
ees engaged in the service, the amount of outstanding securities 
representing capital invested, the number of passengers and tons 
of freight carried, the revenues accruing from the service, the ex- 
penditures involved in rendering it, and the earnings distributed 
annually as a result of railway enterprise. There are more than 
250,000 miles of line in the United States, representing only single 
track mileage. If we include the length of second, third, and fourth 
tracks, and the mileage of yard tracks and sidings, the total mileage 
operated in the United States in 1910 was 351,767. The figures 
for equipment are equally stupendous. There were 58,947 loco- 
motives and 2,290,331 cars devoted tO' the service rendered by Amer- 
ican railways. The number of employees was 1,699,420 — ^the larg- 
est number of wage-earners engaged in any single American in- 
dustry wnth the exception of agriculture. The outstanding securi- 
ties amounted to $18,417,132,238, representing an investment in rail- 
way transportation which is likewise second only to agriculture. 
The number of passengers carried during the year 1910, earning 
revenue for the railroads, was 971,683,199; the number of tons of 
freight carried during the same year, earning revenue for the rail- 
roads was, 1,849,900,101. If we take distance into consideration 
and determine the number of passengers and the number of tons 
of freight carried one mile, the figures become so large as to pass 
beyond human conception. The number of passengers carried one 
mile was 32,338,496,329, and the number of tons of freight carried 



RAILROAD RATES AND REGULATION 271 

one mile was 255,016,910,451. The revenues from operation amount- 
ed to $2,750,667,435 ; the operating expenditures were $1,822,630,- 
433 ; and the earnings actually distributed as dividends during this 
single year amounted to $293,836,863. The immensity of these fig- 
ures must be apparent to every one, and no further comment is 
necessary to indicate the vast extent of American railway interests. 

154. The Public Nature of the Railroad Business. 

BY WALTER CHADWICK N0'YE:S. 

A railroad corporation is of a dual nature. The State grants 
to it the right of eminent domain — the power to' condemn for its 
way and structures — for the public benefit. In accepting its charter 
it assumes obligations tO' the public and, within constitutional limits, 
becomes subject to State regulation. In this degree it is a public 
corporation. On the ot'her hand, the stockholders furnish the means 
for the construction and equipment of the railroad and are entitled 
to the profits derived from its operation. To' this extent a railroad 
company is a private corporation. Being thus, at once a public 
corporation existing for private gain and a private corporation ow- 
ing public duties, a railroad company is distinctively a quasi-public 
corporation — a corporation of double obligations. 

The public duties of a railroad are not wholly dependent upon 
its corporate character. If it were under no responsibilities to the 
State in consideration of the grant of its charter it would still owe 
obligations to the public. It is a common carrier. Its road is a 
public highway. It applies its private property to a use in which 
the public is interested. It is engaged in a business afifecting the 
public and is subject to governmental control. "Property does be- 
come clothed with a public interest when used in a manner to make 
it of public consequence and affect the community at large. When, 
therefore, one devotes his property to^ a use in which the public has 
an interest he, in effect, grants to the public an interest in that use, 
and must submit to be controlled by the public for the common good 
to the extent of the interest he has thus created." 

Whether, therefore, the railroad corporation be regarded as of 
both a public and private nature, or whether its private property 
be considered as clothed with a public interest, the result is the 
same — its rates are subject to governmental control. The right of 
control, however, is not unlimited. Power to regulate is not power 
to destroy. Limitation is not confiscation. 



272 READINGS IN ECONOMIC PROBLEMS 

155. The Economic Basis of Regulation. 

BY I. i,e;o sharfman. 

The need of a system of governmental control arises from the 
economic characteristics of the railway. Most of the important 
questions involved in the so-called railroad problem can be traced 
to the economic character of the railway business. It is necessary, 
therefore, to indicate the general nature of those economic partic- 
ularities and their most striking consequences. 

The Monopolistic Character of the Raihvay Business. The need 
of regulation depends chiefly upon the monopolistic character of the 
railway business. In ordinary industrial enterprises the existence 
of competition, when free and unrestricted by artificial means, pro- 
vides an automatic force for the protection of the public. High 
prices and large profits in a given industry tend to attract additional 
capital tO' that industry, which results, in the long run, in a read- 
justment of charges and a reduction of net returns. In like manner, 
inefficient service and goods of inferior quality cannot pemianently 
be imposed upon the public because a policy w'hich is clearly detri- 
mental to the interests of the consumer cannot permanently with- 
stand the force oi competition. Th.e railway business, on the other 
hand, tends to be operated under monopolistic conditions. To somie 
extent railways are entirely exempt from the operation of compe- 
tition. The amount of capital necessary for the construction of a 
railway is so large and the task of railway building is so substantial 
that competition is always relatively slow in becoming active. Cap- 
italists will not unite so promptly in building a parallel road because 
of the large sums that must be risked in the enterprise ; and even 
when they decide to enter upon such an undertaking, the work of 
construction requires so much time that the appearance of active 
competition is still further delayed. Moreover, even when the par- 
allel road is built, it actually competes with the original line only at 
certain points, usually the more important cities, while at inter- 
mediate points the lines separate and pass through numerous small 
communities which have no other railway facilities. At these non- 
competing points, then, the railways usually enjoy a monopoly of 
local traffic ; and while the number of non-competing points is grad- 
ually being reduced by the construction of new steam, roads and the 
multiplication of electric railway lines, doubtless, because of the 
very nature of the railway, there will always be many localities 
which, in the absence of government control, will be at the mercy 
of one transportation agency. In part, therefore, the railway busi- 
ness is clearly monopolistic in character. 



RAILROAD RATBS AND REGULATION 273 

The Nature of Raihmy Competition. But the railway business 
tends to be carried on under monopolistic conditions even when 
competition does exist, because of the character of railway competi- 
tion. Railway rivalry tends to be abnormally keen and competition 
ruinous. This, in turn, leads to cooperation in various forms, and 
the inevitable result follows that railway competition becomes self- 
destructive. Competing railway companies, weary of the keen 
struggle which invariably ensues when competition beconies active, 
either assent to a truce whereby competition between them is abol- 
ished and an agreement is reached for the maintenance of rates, 
or they continue their warfare until one of the roads is driven to 
insolvency, and the unsuccessful line, upon reorganization, is taken 
over by its victorious rival. In either case effective competition 
is destroyed and monopoly conditions are established. The basis 
of this ruinous competition is to^ be found in two fundamental 
economic characteristics of the railway business: 

Joint Cost and Raihvay Management. The services of a rail- 
way are rendered to a very large degree at joint cost. Fro^m one- 
half to three-quarters of a railway's expenditures must be incurred 
regardless of the performance of any particular service. In order 
to conduct transportation at all, a roadbed must be provided, tracks 
must be laid, terminals must be built. This plant is equally neces- 
sary for the transportation of passengers and freight, and express 
and mail matter. Moreover, it is equally necessary for the trans- 
portation oi different classes of passengers and dift'erent kinds of 
freight. The expenditures for the fundamental purpose of pro- 
viding the plant oi a railway enterprise create the fixed charges 
of the business : and these fixed charges, the interest on the capital 
invested in the construction of the railway, form a part of the 
cost of every service rendered by that railway. As far as expendi- 
tures for plant are concerned, all railway operations are conducted 
at joint cost. But even the operating expenses are largely joint. 
The roadbed and equipment must be maintained in a state of reason- 
able repair and efficiency, and many oi the employees and much of 
the material necessary for conducting transportation must be pro- 
vided and most of the general administrative expenses must be 
met, regardless of the amount or the kind of traffic carried by the 
railway. In other words, a substantial proportion of the operating 
expenses, like the fixed charges, are constant. It is practically im- 
possible, therefore, for the railway manager to ascertain the exact 
cost O'f a given service. Rate making must necessarily involve a 
large degree of guesswork, though it is true that this guesswork 
is entrusted tO' experts. Railway officials have no means of de- 



274 



RBADINGS IN ECONOMIC PROBLEMS 



termining with certainty that rates have been reduced to unprofit- 
able hmits. Under the stress of keen competition, then, conditions 
are decidedly favorable to ruinous rate-cutting: and cutthroat com- 
petition invariably becomes self-destructive. 

Increasing Returns and Railway Policy. Railway operations 
are so largely conducted at joint cost because a very large propor- 
tion oi railway expenditures are fixed or constant. If a railway is 
built and equipped and is carrying a given amount of traffic, it can 
usually handle a vastly increased quantity of business at a relatively 
slight additional expense. Within very wide limits, a given plant 
and equipment will accommodate a large as well as a small amount 
of traffic, and the only additional cost involved in handling an in- 
crease in traffic will consist in that portion of the operating ex- 
penses which varies with the amount and kind of service rendered. 
In other words, the expenditures of a railway company do not 
keep pace with the services which it performs ; an increase in 
traffic does not involve a proportionate increase in railway ex- 
penditures. If follows, then, that with each increase in the amount 
of traffic carried, the cost per unit decreases ; and the net revenues 
of a railway increase faster than the growth of its traffic. The rail- 
way business is subject to the law of increasing returns: every in- 
crease in traffic results in more than a proportionate increase in 
profits. Railway traffic managers, therefore, work under a powerful 
incentive to increase the volume of their business, and the compe- 
tition for traffic is intense. In fact, the passion for traffic becomes 
the controlling passion of the railway business. Traffic managers 
consider it their most urgent duty to get business — to get it at the 
highest rates possible, but in any event to get it. The profitable 
limit of rate reduction is so uncertain, because railway expenditures 
are largely joint, and the advantage of extensive traffic is so great, 
because railway expenditures are largely constant, that there is a 
natural and compelling tendency on the part of railway officials to 
reduce rates to whatever point may be necesary in order to attract 
business from competing lines. Ruinous rate wars follow and com- 
petition tends to destroy itself. These conditions lie at the basis of 
the abnormal character of railway competition which almost in- 
variably leads to railway operation under monopolistic conditions. 

Raihvay Competition and Discriminatory Practices. The keen 
rivalry for business leads not merely to rate wars and general rate 
cuttings, but to discriminatory practices as well. The passion for 
business is so intense that the traffic manager will resort to any 
means in order to get it. If the amount of railway traffic can be 
extended and hence the size of railway profits disproportionately 



RAILROAD RATES AND REGULATION 275 

increased by means of granting special privileges in the transpor- 
tation of one commodity as compared with another, or in the case 
of one person or locality as compared with competing shippers or 
markets, railway officials will not hesitate long to resort tO' these 
discriminatory practices. The history of American railways, and 
of our monopolistic industrial combinations or so-called trusts, di- 
vulges no greater evil than the granting of railway discriminations 
in rates and service for the benefit of one person, locality, or kind 
of traffic, to the prejudice and disadvantage of rival shippers, places, 
and industries. The motive or stimulus for these practices lies in 
the keen desire for additional business, with its disproportionate in- 
crease in railway profits. Discrimination has been one of the most 
baneful as well as one of the most certain effects of railway com- 
petition. 

Raikwy Discrifnination and the Public Welfare. The danger 
as well as the injustice of discriminatory practices cannot be over- 
emphasized. If our industrial life is to reach its natural and most 
efficient economic development, there must be freedom of enter- 
prise and fairness of treatment for all persons, all sections, and 
all undertakings. In a sense, transportation is a fundamental in- 
dustry, underlying all others ; for it is essential to the conduct of 
all business and goes far towards determining the direction and 
conditions of industrial activity. The item of transportation, what- 
ever it may be, is one of the elements in all costs, and the outcome 
of competition between different producers may be largely affected 
by any divergence in railway rates which must be paid by eadi 
of two or more competitors. It follows clearly, then, that the 
railway officials who make transportation rates exercise a tre- 
mendous power. By the soundness of their adjustment of rates 
and by the degree of fairness with which established rates are 
observed, the railways may profoundly affect — or absolutely de- 
termine even — the prosperity of individuals, of industries, O'f cities 
and towns, or oi entire sections of the countr}^ By discriminating 
between competing shippers, they may destroy the business of one 
and build up that oi another, making one man rich and another 
poor. By stimulating or discouraging a particular class of traffic 
they ma}^ increase or diminish the importance of industries and the 
extent of production of particular articles of commerce, shaping 
the direction of industrial activity. By discriminating among cities 
and towns, they may cause one to grow and another to decay, de- 
termining the commercial importance of business centres. By 
modifying their rate schedules in special instances, they may de- 
termine the location of industries, guiding the movements of popu- 



276 READINGS IN ECONOMIC PROBLEMS 

lation and affecting the prosperity and welfare of extensive local- 
ities. By these unfair practices the railways also have it within 
their power to build up industrial monopoly ; and the most power- 
ful of the trusts against which the people are now struggling made 
their first advances towards control of the market through the 
agency of special favors in the form of railway discriminations. 



B. DISCRIMINATORY PRACTICES OF THE RAILROADS. 
156. Standard Oil and Railroad Rebates. 

BY IDA M. TARGEI^Iv. 

In the fall of 1871, certain men brought tO' Mr. Rockefeller a 
remarkable scheme, the gist of which was to bring together secretly 
a large enough body of refiners and shippers to persuade all the 
railroads handling oil to- give to the company formed special re- 
bates on its oils, and drawbacks on that of other people. If they 
could get such rates it was evident that those outside of their 
combination could not compete with them. Then, too, they could 
easily persuade the railroads to transport no crude for exportation, 
so that the foreigners would be forced to^ buy American refined. 
They believed that the price of oil thus exported could easily be 
advanced fifty per cent. The control of the refining interests would 
also enable them to fix their own price on crude. As they would 
be the only buyers and sellers, the speculative character of the 
business would be done away with. In short, the scheme they 
worked out put the entire oil business in their hands. It looked 
as simple to put into operation as it was dazzling in its results. 
This proposal resulted in the organization of the South Improve- 
ment Company, in which the Standard Oil of Cleveland was the 
leading subsidiary concern. Although the company controlled less 
than one-tenth of the refining business in the United States, the 
gentlemen composing it assured the railroads that they controlled 
the business. 

Contracts with the railroads were quickly drawn up. By the 
i8th of January the president of the Pennsylvania road, J. Edgar 
Thompson, had put his signature to the contract, and soon after 
Mr. Vanderbilt and Mr. Clark signed for the Central system, and 
Jay Gould and General McClellan for the Erie. The contracts fixed 
gross rates of freight from all common points, as the leading ship- 
ping points within the Oil Regions were called, to all the great re- 
fining and shipping centres — NeAv York, Philadelphia, Baltimore, 



RAILROAD RATES AND REGULATION 277 

Pittsburg and Cleveland. For example, the open rate on crude to 
New York was put at $2.56. On this price the South Improvement 
Company was allowed a rebate of $1.06 for its shipments; but it 
got not only this rebate, it was given in cash a like amount on each 
barrel of crude shipped by parties outside the combination. 

The open rate from Cleveland to New York was two dollars, 
and fifty cents of this was turned over to the South Improvement 
Company, which at the same time received a rebate enabling it to 
ship for $1.50. Again, an independent refiner in Cleveland paid 
eighty cents a barrel to get his crude from the Oil Regions to his 
works, and the railroiad sent forty cents of this money to the 
South Improvement Company. At the same time it cost the Cleve- 
land refiner in the combination but forty cents to get his crude oil. 
Like drawbacks and rebates were given for all points — Pittsburgh, 
Philadelphia, Boston and Baltimore. 

An interesting provision in tlje contracts was that full waybills 
of all petroleum shipped over the roads should each day be sent 
to the South Improvement Company. This, of course, gave them 
knowledge of just who was doing business outside of their com- 
pany — of how much business he was doing, and with whom he 
was doing it. Not only were they to have full knowledge of the- 
business of all shippers, but they were also to have access to all 
books of the railroads. 

The reason given by the railroads in the contract for granting 
these extraordinary privileges was that the "magnitude and ex- 
tent of the business and operations" purposed tO' be carried on by 
the South Improvement Company would greatly promote the in- 
terest of the railroads and make it desirable for them to encourage 
their undertaking. The evident advantages received by the rail- 
road were a regular amount of freight, fixed rates, and freedo^m 
from the system of cutting which they had all found so harassing 
and disastrous. That is, the South Improvement Company, which 
was to include the entire refining capacity of the company, was to 
act as the evener of the oil business. 

157. Discriminations between Commodities. 

BY ALBERT N. ME^RRITT. 

Many instances of sudden and arbitrary changes in the differ- 
entials upon competing classes of commodities might be given, and 
frequently the public has suffered severe loss in property values as 
the result of such actions. Take the case of the recent advance in 
the rate on corn-meal from Kansas points to Texas. For ten years 



278 READINGS IN ECONOMIC PROBLEMS 

the rate on corn-meal had been three cents higher than the rate on 
corn. On the basis of this differential the Kansas millers had 
found themselves able to compete with the Texas millers, and a 
large portion of the corn-meal used in Texas was ground in Kansas. 
In January, 1905, at the instigation of the millers of Texas, the 
Railroad Commission of that state announced a hearing for the 
purpose of determining whether intrastate grain rates should be 
reduced. In order to prevent this, the railroads went to the millers 
and made a bargain with them. If the millers would agree to drop 
their complaint before the Texas Commission, the railroads, on their 
part, would advance the rate on corn-meal so as to exclude the 
Kansas millers from the Texas market. The bargain was car- 
ried out to the letter. The millers failed to appear before the 
Commission upon the date set for the hearing, and the grain rates 
within the state were not reduced, while on the 19th of February, 
the railroads fulfilled their part of the contract by advancing the 
rate on corn-meal by an average of sV^ cents per 100 lbs., without 
any corresponding increase in the rate on corn. The result was 
that the Kansas millers were practically prohibited from shipping 
any corn-meal into the State of Texas. Thus the principal market 
of a very important industry of Kansas was swept away by the 
stroke of a pen. Not only will the Kansas millers lose, but the 
Texas consumers will loise also. Texas is unsuited for carrying on 
the milling industry. Mills were introduced into Texas more than 
twenty years ago. Yet the Kansas mills, handicapped as they were 
by a differential of three cents per 100 lbs., found themselves able 
to compete with the millers of Texas in supplying that market. 
The Texas millers have now secured the monopoly which they de- 
sired, and the Texas consumers will pay for it in the price of meal. 
On one occasion the railroads threatened to destroy the whole 
export flour industry of the Northwest. The rates on wheat and 
flour had l3een the same for many years. Suddenly the roads ad- 
vanced the rate on flour till they exceeded those ou wheat by from 
four to eleven cents per |oo lbs. The result was that the exports 
of flour instantly fell off as compared with those of wheat. As 
long as these rates prevailed, the Western millers were entirely 
excluded from any share in the export flour trade. Not only did 
the milling industry of that section suffer, but also the resources of 
the country were weakened. Experts have declared that a most im- 
portant factor in maintaining the fertility of the soil is the con- 
sumption of the by-products of the grain near the point of produc- 
tion. But if the wheat is exported instead of being ground in the 
Northwest, such products as the bran and the shorts are consumed 



RAILROAD RATES AND REGULATION 279 

in Europe instead of in this country, as they would be if the wheat 
were ground at home. 

Other cases of unjust discrimination between competing- classes 
of commodities have been Oif frequent occurrence. Thus twO' kinds 
of soap, though substantially similar in price, bulk, and value, were 
carried at different rates. In another case, common soap was car- 
ried at 33 cents per 100 lbs., while 73 cents was charged for Pear- 
line, a competitor of soap. 

158, Variety in Railway Discrimination. 

BY FRANK PARSONS. 

Numerous substitutes for the direct rebate were used. In some 
cases $10 a car was paid on shipments oi flour from the Northwest 
under pretense oi paying the cost of loading the car above the 
minimum weight. Railroads paid 50 cents for the loading of each 
private stock car, and % of a cent for every mile the car was hauled. 
A single railroad coinpany, running out of Chicago, paid car mile- 
age tO' 65 different companies or firms owning cars. Private cars, 
owned by the railroads, but chartered for private use, were the 
subject of discrimination of another kind. For example, a com- 
mercial salesman travelled over the Northern Pacific in a private 
car stocked with samples. For the first trip he paid fifteen round- 
trip fares between St. Paul and Portland, but for subsequent trips 
the road charged 15 local fares from point tO' point. 

Terminal charges for delivery at certain points were made a 
mieans for discrimination. Free cartage for some shippers and not 
for others, or for one town and not for another, gave a decided ad- 
vantage to the favored town. To get the business of B, a Pitts- 
burg dealer in beer, the B. & O. gave B 3^2 cents per hundred for 
the hauling of his own beer from the station, while K, another beer 
dealer there, received no such concession. In Grand Rapids, Michi- 
gan, free cartage had been in vogue for 25 years, but in Ionia, near 
by, no free cartage was afforded by the railroads. 

Denial of the stoppage-in-transit privilege at one place while 
allowing it at another is unlawful. Diff'erences in the time for un- 
loading may amount tO' a substantial preference. At Philadelphia 
96 hours were allowed for unloading, against 72 hours at interior 
points. Free storage is another method of favoritism, sometimes 
used systematically and extensively. Overbilling and underbilling 
have been found tO' be very convenient substitutes for the rebate. 
A bill of lading may acknowledge the receipt of 70 barrels of flour ; 
65 only are shipped, and the railroad pays damages for the loss of 



28o READINGS IN ECONOMIC PROBLEMS 

the five nonexistent barrels. On the other hand, railroads have 
been known to suggest to millers that they ship flour on the gener- 
ous plan of shipping 20 barrels and billing 15. At another time the 
cashier of an important firm is made a nominal agent for the rail- 
way company, and under the name of commission to him an enor- 
mous rebate is allowed for all the business his employers send over 
the line. Or again, the railway company purchases from a favored 
trader its supplies of the goods in which he deals, at a fancy price. 

The "expense bill system" has proved tO' be an instrument of 
preference. On presentation of an expense bill showing payment 
for shipments into Kansas City the railroads would allow reship- 
ment of an equal weight from Kansas City to Chicago at the bal- 
ance of the through rate from the point of origin to Chicago. Re- 
bate equivalents are given in the form of elevator rebates and allow- 
ances. Elevators owned or controlled by railroad companies are 
leased at nominal charges to favored shippers, or secret commissions 
are paid to favored parties for all grain consigned to specified 
elevators. The railroads deny equal rates in the building of ele- 
vators. 

The head of a road running into Chicago from Missouri River 
points formed a grain company to buy grain in Kansas City and 
sell it in Chicago. The railway guaranteed the grain company 
against loss. When wheat was 50 cents in Kansas City and 60 
in Chicago, the grain company paid 51 cents in Kansas City to get 
the grain. The railroad charged the regular 10 cent tariff. The 
grain was sold at 60. The railroad paid back the i cent on the 
guarantee and still made 9 cents. And the railroad-grain-company- 
combine was able to drive other buyers out of the market and other 
railroads out of the trafBc. 

Railroads sometimes seek to evade the law by contracting to de- 
liver goods at a certain price including the freight and the pay- 
ment for the goods in one lump sumi, so that the freight charge is 
merged and cannot be ascertained. 

Among other substitutes for rebates too numerous to mention 
are the following: Combination rates of which informed shippers 
may take advantage ; flying rates, or "midnight tariffs ;" terminal or 
private railway abuses ; unfair division of rates ; maintaining or 
paying for the maintenance of tracks or other property belonging 
to the shipper; unfair classification; use of different classification 
for local and through traffic ; fictitious entries in the prepaid column 
of the freight bill; not billing at all, carrying goods free; with- 
holding cars ; arbitrary routing of shipments ; and refusal to deliver 
at a convenient point. 



RAILROAD RATES AND REGULATION 281 

159. Recent Forms of Railway Discrimination. 

BY WILIvIAM Z. EIPLEY. 

With the passage of time, and especially since 1896, new and 
even more elaborate schemes for rebating have come to light. One 
of the most ingenious, which was discovered about 1904 to be very- 
widespread, was_the use of terminal or spur track railway com- 
panies. In Hutchinson, Kansas, for example, were salt works hav- 
ing a capacity of some 6,000 barrels a day. Two railways were 
available for shipments. A new company was incorporated, all its 
stock being held by the salt works owners, which constructed sidings 
to both railroad lines. The spur track was less than a mile long 
and cost only about $8,000 to build. But the company was chartered 
as the Hutchinson & Arkansas River Railroad.. Its officers were the 
owners of the salt mills. It owned neither engines nor cars. Yet 
it entered into a traffic agreement with the Atchison road for a 
division of the through rate to many important points, its share 
being about twenty-five per cent. 

Obviously, rebates assuming the above- described form are open 
only to very large shippers, to^ whom it is worth while to incur the 
considerable expense. The International Harvester Company at 
Chicago had for years performed much of its own terminal service; 
and until 1904 was allowed as high as $3.50 per car for switching 
charges by connecting railroads. It then incorporated the Illinois 
Northern Railroad, wliich was prornptly conceded twenty per cent 
of all through rates, with the Missouri river rate as a maximum.. 
On this traffic it would be allowed as high as $12 per car, instead of 
$3.50 as before. 

The so-called "midnight tariff" was a strictly legal way of con- 
ferring favors upon certain shippers. It was much in evidence dur- 
ing the grain wars between hues serving the Gulf ports about 1903. 
And it seems to have been a device used at times all over the country. 
A traffic manager wishing tO' steal all the business of a large shipper 
from some competing road, and tO' build himself up at the expense 
of his rivals, secretly agrees to put into effect a low rate on a given 
date. The shipper then enters intO' contracts calling for perhaps 
several hundred car-loads of grain to be delivered at that time. 
This reduction is publicly filed, perhaps thirty days in advance, with 
the Interstate Commerce Commission at Washington. But who is 
to discover it, in the great medley of new tariffs placed on file every 
day ? Yet this is not all. A second tariff, restoring the full rate, is 
also filed to take effect very shortly — perhaps only a day — after the 
reduction occurs. All these are public, and open to all shippers alike. 



282 



READINGS IN ECONOMIC PROBLEMS 



But only the one who was forewarned is able to take advantage of 
them. 

An entirely different plan of rebating — and a most effective one 
— has to do with apparently unrelated commercial transactions. 
Many shippers are large sellers of supplies to the railroad. How 
easy then to make a concession in rates to an oil refinery, for ex- 
ample, by paying a little extra for the lubricating oil bought from 
a subsidiary concern. The Federal authorities in recent years, and 
especially in connection with the prosecution of the Standard Oil 
Company in 1908-1911, have discovered the most extraordinary 
variations in the prices paid by railroads for supplies. Independent 
concerns were often not allowed tO' compete in the sale of lubri- 
cants at all. It would be difficult to^ prove any connection between 
so widely separate sets of dealings; and yet it is clear that rebates 
are often given in this way. Or even more fruitful as an ex- 
pedient, especially in these later days, when rebating is a serious 
offence, why not confer a favor by extra liberality in allowances 
for damages tO' goods in transit? 

Personal discrimination may be as effective upon competition 
through denial of facilities tO' some shippers as through conferring 
of special favors upon others. P'ractices of this sort have been 
quite common in the coal business, especially in the matter of fur- 
nishing or refusing to furnish an ample supply of cars or suitable 
spur tracks to mines. In 1906 camie the startling revelations upon 
the Pennsylvania Railroad as to the practice of discrimination in 
furnishing cars to coal mines. A comiprehensive investigation by 
the company itself resulted in the discharge of a number of high 
officials. It appeared, for example, that the assistant to President 
Cassatt had acquired $307,000 in stock of coal companies without 
cost; that a trainmaster for $500 had purchased coal mine stock 
which yielded an annual income of $30,000 ; and that one road fore- 
man was given three hundred shares of the same company stock for 
nothing. In all these cases the object was to secure not only an 
ample supply of cars for the favored companies, but perhaps even 
the denial of suitable service to troublesome competitors^ 

Yet other means of favoring large shippers at the expense oi 
small ones are almost impossible tO' eradicate. The record of the 
vigorous prosecutions against rebating, under the Elkins law, af- 
fords conclusive evidences not only as to the widespread extent of 
the evil, but as to its identification with many of the large industrial 
combinations. There was collected in fines for rebating between 
October, 1905, and March, 1907, the sum of $586,000. Several 
men were sent to jail, for from three to six months. Among the 



RAILROAD RATES AND REGULATION 283 

trusts implicated were the beef packers, who have been indefatigable 
in concocting rebating devices, the tin plate combination, and, most 
notable of all, the American Sugar Refining Company. Nearly 
$300,000 in fines was imposed upon this concern alone. The secret 
allowances in these cases were most ingeniously arranged. Some 
were "refund of terminal charges ;" some were ''lighterage de- 
murrage ;" some were allowances for damages. Many were paid 
by drafts instead of checks, sO' as tO' preclude identification of in- 
dividuals ; some were by special bank account ; but the sums in- 
volved were very large. 

The following quotation from a letter from an agent of the 
sugar trust accompanying a claim for overcharge of $6,866 on 
shipments of syrup, introduced in evidence in one of these cases, 
aptly describes the situation, both then, now, and always. "We 
hope to devise some means to enable us tO' conduct our freight mat- 
ters with the transportation companies satisfactorily even under the 
new conditions imposed by the Elkins bill ; but there may be some 
cases that cannot be taken care of, in the event of which we will, 
like all other shippers, have to take our medicine and look pleasant." 
The Interstate Commerce Commission reported as to the conditions 
in 1908 that "many shippers still enjoy illegal advantages." 

Thus the rebate as an evil in transportation, even since amend- 
ment of the law in 1906-1910, while under control, is still far from 
being eradicated. Favoritism lurks in every covert, assuming al- 
most every hue and form. Practices which outwardly appear to be 
necessary and legitimate, have been shown to conceal special favors 
of a substantial sort. 



C. THE NATURE AND EXTENT OF REGULATION. 
160. Causes of Complaint Against the Railroad System.* 

BY I^OGAN G. MCPHERSON. 

1. That local rates were unreasonably high, co'mpared with 
through rates. 

2. That both local and through rates were unreasonably high 
at noncompeting points, either from the absence of competition or 
in consequence of pooling agreements that restricted its operation. 

3. That rates were established without apparent regard to the 

* These complaints were made in 1886, just before the establishment of 
the Interstate Commerce Commission. 



284 READINGS IN ECONOMIC PROBLEMS 

actual cost of the service performed, and are based largely on 
"what the traffic will bear." 

4. That unjustifiable discriminations were constantly made be- 
tween individuals in the rates charged for like service under similar 
circumstances. 

5. That improper discriminations were made between articles 
of freight and branches of business of a like character, and between 
different quantities of the same class of freight. 

6. That unreasonable discriminations were made between lo- 
calities similarly situated. 

7. That the effect of the prevailing policy of railroad manage- 
ment was, by an elaborate system of secret special rates, rebates, 
draw^backs and concessions, to foster monopoly, to enrich favored 
shippers, and to prevent free competition in many lines of trade 
in which the item of transportation is an important factor. 

8. That such favoritism and secrecy introduced an element of 
uncertainty into legitimate business that greatly retarded the devel- 
opment of our industries and commerce. 

9. That the secret cutting of rates and the sudden fluctuations 
that constantly took place were demoralizing to all business except 
that of a purely speculative character, and frequently occasioned 
great injustice and heavy losses. 

10. That, in the absence of national and uniform legislation, 
the railroads were able, by various devices, to avoid their respons- 
ibility as carriers, especially on shipments over more than one road, 
or from one State to another, and that shippers found great diffi- 
culty in recovering damages for loss of property or for injury 
thereto. 

11. That railroads refused to be bound by their own con- 
tracts, and arbitrarily collected large sums in the shape of over- 
charges, in addition to the rates agreed upon at the time of ship- 
ment. 

12. That railroads often refused to recognize or be responsible 
for acts of dishonest agents acting under their authority. 

13. That the common law failed to afford a remedy for such 
grievances and that in cases of dispute the shipper was compelled 
to submit to the decision of the railroad manager or pool commis- 
sioner, or run the risk of incurring further losses by greater dis- 
criminations. 

14. That the differences in the classifications in use in various 
parts of the country, and sometimes for shipments over the same 
roads in different directions, were a fruitful source of misunder- 
standings, and were often made a means of extortion. 



RAILROAD RATES AND REGULATION 285 

15. That a privileged class was created by the granting of 
passes, and that the cost of the passenger service was largely in- 
creased by the extent of this abuse. 

16. That the capitalization and bonded indebtedness of the 
roads largely exceeded the actual cost of their construction or their 
present value, and that unreasonable rates were charged in the 
effort to pay dividends on watered stock and interest on bonds im- 
properly issued. 

17. That railroad corporations had improperly engaged in lines 
of business entirely distinct from that of transportation, and that 
undue advantages had been afforded to business enterprises in 
which railroad officials were interested. 

18. That the management of the railroad business was ex- 
travagant and wasteful, and that a heedless tax was imposed upon 
the shipping and traveling public by the unnecessary expenditure of 
large sums in the maintenance of a costly force of agents engaged 
in a reckless strife for competitive business. 

161. The Provisions of the Inter-State Commerce Act. 

BY IvOGAN G. MCPHERSON. 

The Interstate Commerce Act, taking effect April 5, 1887, 
practically applied the principles of the common law which inhere 
in the unlimited jurisdiction of the State courts to the regulation of 
interstate trafific by the Federal courts. It provided : 

First — 'That charges for transportation must be reasonable and 
just; prohibiting any unjust discrimination by special rates, rebates, 
or other devices, and any undue or unreasonable preferences ; 

Second — 'That there should not be a greater charge for a short 
haul than for a long haul over the same lind in the same direction 
under substantially similar circum^stances and conditions; 

Third — ^Prohibited the pooling of freights and the division of 
earnings ; 

Fourth — Prohibited any device to prevent the continuous car- 
riage of freights ; 

Fifth — Provided for the publicity and filing with the Commis- 
sioner of all tariffs ; 

Sixth — The Interstate Commerce Commission created by the 
Act is given power to investigate complaints against carriers and 
to make reports of its investigation in writing; 

Seventh — The Interstate Commerce Commission is authorized, 
in case it finds that the carrier has violated the law, to order it to 



286 READINGS IN ECONOMIC PROBLEMS 

desist and make reparation for injury done. In case these orders 
are not obeyed the Comimission is empowered to proceed in a sum- 
mary way tO' have the Circuit Court of the United States enforce 
them. 

162. The Provisions of the Elkins Act. 

BY HEJNRY S. HAINE^S. 

In 1903 the Interstate Commerce Act was still further amended 
by the passage of '"An Act to further regulate Commerce with For- 
eign Countries and among the States," commonly known as the 
Elkins I^aw ; also by "An Act to expedite the Hearing and Deter- 
mination of Suits in Equity, etc.," that were brought under the 
Interstate Commerce Act or the Anti-Trust Law. 

The changes wrought in the Interstate Commerce Eaw by the 
Elkins Eaw are succinctly stated by the Interstate Commerce Com- 
mission as follows : 

I. The carrier is made criminally liable where the individual 
was before. 

II. A wilful failure to- publish tariffs is punished by a maximum 
fine of $20,000, as also^ the offering, soliciting, or accepting of any 
rebate, concession, or discrimination, amounting to a lower rate 
than published. The inclusion of a discrimination in this connec- 
tion is considered an important change. 

III. All penalties of imprisonment repealed. 

IV. Shipper as well as carrier included in proceedings before 
the Commission. 

V. Circuit Courts are given power to interfere by summary 
process to prevent departures from published tariffs and to prevent 
other forbidden discriminations. There is no material change in 
the things prohibited, but the penalties are changed and the criminal 
provisions made more definite and punitive. 

163. The Provisions of the Hepburn Bill. 

BY LOGAN G. MCPHERSON. 

The Hepburn Bill took effect on August 28, 1906. The bill pro- 
vides : 

(a) That as "common carriers" under the Interstate Com- 
merce Law shall be included companies transporting oil by pipe 
lines, express companies, sleeping car companies, all switches, 
tracks, terminal facilities, and that "transportation" under the law 
shall include all cars regardless of their ownership, and all service 
in transit. 



RAILROAD RATES AND REGULATION 287 

(b) Prohibits the issue of passes, with certain specified ex- 
ceptions that cover mainly employes, fixing a penalty in case of 
violation that shall apply to both the giver and the recipient. 

(c) Makes it unlawful after May ist, 19018, for any railroad 
company to transport for sale any commodities in which it may 
have a proprietary interest, except lumber and its products. 

(d) Provides that a common carrier shall provide, when 
practicable, and upon reasonable terms, a switch connection for any 
applicant who' shall furnish sufficient business to- justify its oper- 
ation. 

(e) Makes more explicit the specification as to the filing of 
tarifi^s, especially providing for the posting and filing of through 
tariffs ; fixing penalty for violation. 

(f) Provides that "every person or corporation, whether car- 
rier or shipper, who shall knowingly offer, grant, give or solicit, 
or accept, or receive rebates, concession, or discrimination, shall be 
deemed guilty of a misdemeanor, and on conviction thereof shall 
be punished by a fine of not less than one thousand or more than 
twenty thousand dollars." Moreover, any person, whether officer 
or director, agent or employe, convicted of such misdemeanor, 
"shall be liable to imprisonment in the penitentiary for a term not 
exceeding twO' years, or both fine and imprisonment in the discre- 
tion of the court." In addition, the acceptor of any rebate shall 
forfeit to the United States three times the amount of the rebate. 

(g) Provides for the publication of the reports and the de- 
cisions of the Commission and their acceptance as evidence. 

(h) Empowers the Commission, if upon complaint it finds 
that a rate, or any regulation or practice affecting a rate, is "Un- 
just or unreasonable, or unjustly discriminatory, or unduly prefer- 
ential or prejudicial," to determine and prescribe a maximum rate 
to be charged thereafter and modify the regulation or practice per- 
taining thereto. 

(i) Empowers the Commission to award damages against a 
carrier in favor of a complainant. 

(j) Provides for forfeit to the United States, in case of neglect 
to obey an order of the Commission, in the sum of five thousand 
dollars for each offense, each violation and each day of its continu- 
ance to be deemed a separate offense. 

(k) Empowers the Commission to apply to a circuit court 
for the enforcement of its order, other than for the payment of 
money ; for the appeal by either party tO' the Supreme Court of the 
United States ; and that no order of the Commission shall be sus- 



288 READINGS IN ECONOMIC PROBLEMS 

pended or restrained, except on hearing, after not less than five 
days' notice to the Commission. 

(1) Provides for the rehearing by the Commission, upon ap- 
plication, at its discretion. 

(m) Authorizes the Commission tO' require annual reports 
from all common carriers, that shall contain specified information ; 
to prescribe the form of any and all accounts, records and memor- 
anda to be kept by carriers, making it unlawful for the carriers to 
keep any other accounts, records, or miemoranda than those pre- 
scribed and approved by the Commission ; provides that all accounts 
of the carriers shall be open to the inspection of the special agents, 
or examiners employed by the Commission. 

(n) Provides that a common carrier issuing a through bill of 
lading shall be responsible for loss, damage or injury to the prop- 
erty covered thereby upon the lines of any company over which 
it may pass, leaving it to the line issuing the way-bill to gain re- 
covery from another line upon which the loss, damiage, or injury 
may have occurred. 

(o) Enlarges the Interstate Commerce Commission from five 
to seven members, with terms of seven years, increasing the salary 
from seven thousand five hundred to ten thousand dollars per 
annum. 

D. ASPECTS OF RATE MAKING. 
164. Freight Classification. 

BY WILWAM Z. RIPLEY. 

Imagine the Encyclopedia Britannica, a Chicago mail-order 
catalogue, and a United States pratective tariff law blended in 
a single volume, and you have a freight classification as it exists 
in the United States at the present time. Such a classification is, 
first of all, a list of every possible commodity which may move by 
rail, from Academy or Artist's Board and Accoutrements to Xylo- 
phones and Zylonite. In this list one finds Algarovilla, Bagasse, 
"Pie Crust, Prepared;" Artificial Hamis, Cattle Tails and Wombat 
Skins ; Wings, Crutches, Cradles, Baby Jumpers and all ; together 
with Shoo Flies and Grave Vaults. Everything above, on, or under 
the earth will be found listed in such a volume. To grade justly 
all these commodities is obviously a task of the utmost nicety. A 
few of the delicate questions which have puzzled the Interstate 
Commerce Commission may give some idea of the complexity of 
the problem. Shall cow peas pay freight as "vegetables, N. O. S., 



RAILROAD RATES AND REGULATION 289 

dried or evaported," or as "fertilizer" — being an active agent in 
soil regeneration? Are "iron-handled bristle shoe-blacking daub- 
ers" machinery or toilet appliances? Are patent naedicines dis- 
tinguishable, for purposes of transportation, from other alcoholic 
beverages used as tonics? What is the difference, as regards rail 
carriage, between a perco'lator and an every-day coffee pot? Are 
Grandpa's Wonder Soap and Pearline to be put in different classes, 
according to their uses or their market price ? When is a boiler not 
a boiler? If it be used for heating purposes rather than steam gen- 
eration, why is it not a stove? What is the difference between 
raisins and other dried fruits, unless perchance the carrier has not 
yet established one industry while another is already firmly rooted 
and safe against competition? 

The classification of all these articles is a factor of primary im- 
portance in the making of freight rates both from a public and 
private point of view. Its public importance has not been fully 
appreciated until recently as affecting the general level of railway 
charges. So little was its significance understood, that supervision 
and control of classification were not apparently contemplated by 
the original Act to Regulate Commerce of 1887. The anomaly ex- 
isted for many years of a grant of power intended to regulate 
freight rates, which, at the same time, omitted provision for control 
over a fundamentally important element in their make-up. Control 
over it has now been assured beyond possibility of dispute by the 
specific provisions of the Hepburn Act of 19 10. 

The freight rate upon a particular commodity between any 
given points is compounded oi two separate and distinct factors : 
one having to do with the nature of the haul, the other with the 
nature of the goods themselves. Two distinct publications must be 
consulted in order to determine the actual charge. Although both 
of them usually bear the name of the railway and are issued over 
its signature, they emanate, nevertheless, from entirely different 
sources. The first O'f these is known as the Freight Tariff. It 
specifies rates in cents per hundred pO'Unds for a number of differ- 
ent classes of freight, nuinerically designated, between all the 
places upon each line or its connections. But it does not 
mention specific commodities. The second publication which 
must be consulted supplies this defect. This is known as the 
Classification. Its function is to group all articles more or less 
alike in character, so far as they affect transportation cost, or are 
affected in value by carriage from place tO' place. These groups 
correspond to the several numerical classes already named in the 
freight tariff. Thus dry goods or boots and shoes are designated 



290 READINGS IN ECONOMIC PROBLEMS 

as first class. It thus appears, as has been said, that a freight rate 
is made up of two distinct elements equal in importance. The first 
is the charge corresponding to the distance ; the other is the charge 
as determined by the character of the goods. Consequently, a vari- 
ation in either one of the two would result in changing the final 
rate as compounded. 

Freight tariffs and classifications are as distinct and independent 
in source as they are in nature. Tariffs are issued by each railway^ 
by and for itself alooe and upon its sole authority. Classifications, 
on the other hand, do not originate with particular railways at all ; 
but are issued for them by cooperative bodies, known as classifi- 
cation committees. These committees are composed of represen- 
tatives from all the carriers operating within certain designated 
territories. In other words, the United States is apportioned among 
a number of committees, to each of which is delegated, by the car- 
riers concerned, the power over classification. New editions of 
these classifications are published from time to time as called for 
by additions or amendments, the latest, of course, superseding all 
earlier ones. Thirty-seven such issues have already appeared in 
series in trunk lines and southern territory, while fifty have been 
put forth in western territory, since the practice was standardized 
in 1888. 

165. Competitive Factors in Rate-Making. 

BY EMOBY R. JOHNSON AND GROVER C. HUEBNER. 

Railroad rates are, to a large extent, the resultant of competitive 
forces. In part the competition is of carriers with each other for 
traffic free to move by more than one line; and, in a still larger 
way, the competition is between industries and among rival pro- 
ducing or trading centers and sections. If a railroad company is 
to prosper, the industries along its lines, the section of country it 
serves, and the markets it reaches must flourish. 

In determining the rates which the traffic will bear, the General 
Freight Agent is influenced by many factors. The strongest force 
is that of competition among markets, or "of interregional, indus- 
trial competition." The asphalt of California, for example, com- 
petes against that of Texas, the West Indies and South America, 
in American cities, and railway rates on the California product 
must be fixed so as to give a wide sale. Likewise the rates on cotton 
goods from southern mills are made so as to allow them tO' find a 
market side by side with the output of New England mills. In- 
numerable instances of interregional competition in manufacturing 
might be cited. The finished product must be carried to market 



RAILROAD RATES AND REGULATION 291 

in rivalry with similar goods from other sections, while raw pro- 
ducts and coal must be hauled to the factories at rates which will 
allow all industries to thrive. Were there no indirect bidding of 
one railway for the traffic of another, this all-pervading competition 
between producing regions would still exert a constant regulative 
pressure upon the level of rates. 

Among the markets themselves the samie forces of commercial 
competition are effective. The Gulf ports compete with the North 
Atlantic ports for the grain exports of the West, and the North 
Atlantic ports strive with each other for this trade. The Gulf ports 
struggle with those of the South Atlantic for the cotton of the 
interior; New Orleans is the rival of Galveston. 

It is chiefly because oi the force of commercial competition that 
freight rates are tO' a large extent interdependent. To change an 
unimportant rate may recjuire the modification of but a few others, 
but to raise or lower the rate on wheat from Chicago tO' New York 
may require the readjustment of many other charges. The rate 
structure, like a spider's web, is delicately interwoven. 

Rival markets and competing producing sections, no matter 
where located, will be kept on a common level, if it is possible for 
the carriers to so place them. At the present time the railway's as 
well as the public realize that artificial limits must often be placed 
upon interregional competition. 

The efforts of rival railways to secure trafific free to move by 
more than one line is a second force influencing the rate maker. Un- 
like the commercial competition just mentioned, it has become less 
instead of more~ powerful ; because, as time goes on, it is more 
largely regulated by the consolidation of competing lines, or by 
traffic associations, community-of-interest arrangements, and in- 
formal mutual understandings. These are the means whereby rival 
railways have sought to substitute cooperation for unrestrained 
competition. This fact is well illustrated by the perennial strife of 
the trunk lines over the relative rates tO' be accorded North Atlantic 
seaports on a traffic tO' and from the central West. 

The fact that the competition among railroads is in service rather 
than on the basis of secret rates enables the railways to regulate 
their struggles so as tO' prevent most, if not all, rate wars ; but reg- 
ulated competition that stops short of open war may not only be 
perpetual, but may also be keen, and may be effective in determin- 
ing both the charges on particular commodities and the general 
level of rates. From the public point of view, this interrailway 
competition may not be an adequate regulator of rates; indeed, it 
may, like interregional industrial competition, lead tO' arbitrary dis- 



292 READINGS IN ECONOMIC PROBLEMS 

criminations that require correction by public authority ; but this 
does not prove the absence or impotency of comjpetition among rail- 
roads to secure traffic free to move by more than one route. 

The influence of water competition upon the policy and practice 
of railway rate making, though less general and less controlling 
now than formerh^, is still a factor of much effect in several parts 
of the country ; and the practical certainty of a general improvement 
of the inland waterways of the United States indicates that water 
competition will be more potent in the future than it is at the pres- 
ent time. 

The rail charges into and out of the Southern States and the 
system of rates that has developed in that section, are largely influ- 
enced by the competitive rates and service of the coastwise vessels. 
Likewise the rates on the transcontinental traffic moving west and 
east between the Atlantic and Pacific sections of the United States 
are absolutely controlled by the competition of the water routes 
via Panama and the Isthmus of Tehuantepec. Moreover, it should 
be specially noted that water competition not only controls certain 
specific railway charges, but also exerts much influence upon the 
general systems of rate nuaking prevailing in different sections of 
the country. 

Railway rates in the future will probably be increasingly sub- 
ject to the regulation of waterway competition. 

1 60. The Futility of Costs as a Basis for Rates. 

BY SYDNE^Y CHARI.ES WILUAMS. 

The theory of price-detennination according to cost of produc- 
tion is usually interpreted to mean that the price of each unit is 
determined ultimately by the cost of production of that unit. Where 
the unit is large and simple, e. g., in the case of a boat constructed 
entirely by hand by one man, the only items of expense will be the 
material, the man's labour, and some trifling sum tO' cover the cost 
and wear and tear of his tools ; and the price he will ask will be 
determined accordingly. Modern industrial conditions, however, 
are much more complicated. A factory or workshop will turn out 
very many units of many different kinds ; involving raw material 
of varying values, processes of all kinds, simple and elaborate, 
machinery and labour of many sorts, and each unit of each kind 
must bear some proportion of those general charges which cannot 
be attributed to any one class of product, but must be borne by the 
whole. 



RAILROAD RATES AND REGULATION 



293 



Now to what extent is it the case that the price charged for each 
unit of railway transport is determined by the cost of producing 
that unit? At first sight it may seem a very simple and satisfactory 
method of arriving at railway charges. The commodity produced 
is one — and its cost per unit can be arrived at, and the price to^ be 
charged fixed accordingly. But this seeming simplicity is very far 
from being present in reality. For when we begin to think of con- 
crete instances of railway transport we see that they include com- 
modities very diverse indeed. There are in the first place very 
many kinds of haulage, pure and simple^ — for long distances, me- 
dium distances, and short distances, with a cost per mile varying 
according to- the distance ; there is haulage of all kinds of goods, 
from coal and limestone tO' fruit, flowers, dynamite, and cigars, and 
of all manner of passengers, from a Royal party in a special train, 
or first-class express traffic to the Scotch moors, to workmen's jour- 
neys at 12 miles a penny or half-day seaside trips at similar low 
charges ; there are also many subsidiary services sometimes given, 
sometimes expressly withheld — cartage, delivery, liability for dam- 
age or loss, refrigeration, use of company's wagons, express speed 
or slow travel, and so forth. In short, we see that the use of the 
purely abstract word "transport" gives a. quite misleading air of 
simplicity to what is really a congeries of operations of the most 
diverse kind. Railways in fact produce a far greater variety of 
commodities than most industrial undertakings. 

But it may be urged, this does not demonstrate the impossibility 
of basing your railway charges on respective costs of production. 
This may be done in one or other of two ways. The first and most 
obvious method is tO' classify your different services and apportion 
to each the peculiar expenses connected with it. Then take the 
v/hole of the remaining expenditure of a general kind and appor- 
tion that among the different services according to their respective 
prime costs. You will now know the expenditure involved by each 
service; and as you know the extent of this traffic you will be able 
to fijx a fair and reasonable charge which will just give you your 
expenditure with a reasonable margin of profit. 

If the matter is so simple it should be child's work tO' apply it 
to the first great division of railway work, that between passenger 
and goods traffic. The simplest and clearest subdivision of railway 
working expenditure is as follows : General Charges, Ways and 
Works, Rolling-Stock, Traffic Department Expenditure. 

Now of all these a good deal is not merely independent of any 
particular kind of traffic but is independent of traffic altogether. 



294 READINGS IN ECONOMIC PROBLEMS 

Among such heads of expenditure are directors' fees, the salaries 
of the managing- and legal staff, the rates and taxes paid, the 
greater part of the cost of maintenance of way and works, and 
some part of the traffic working expenses. These items clearly 
cannot be directly connected with the respective amounts of goods 
or passenger traffic. The cost of passenger and goods locomotives 
and rolling-stock can, however, be so allocated ; so also the cost of 
their respective train-staffs; and some part of the expenditure of 
buildings. Indeed, the very variety of methods adopted to secure 
this allocation themselves testify to the difficulty of the operation; 
train-mileage has been tried and abandoned, working engine hours 
are believed in by some, but the only unanimity among experts is 
as to the caution with which the figures arrived at must be viewed 
and utilized. 

The varying speeds, the different kinds of accommodation, the 
great variety in the number and complexity of the services ren- 
dered, the different sizes of consignments, the different distances 
for which, the different directions in which, and the different times 
at which they travel — all these mean some difference in cost; but 
since this cost is made up of so many countless items, who can 
undertake to reduce it to a definite schedule of fair prices, how- 
ever long and complicated? And to achieve a result of even use- 
ful accuracy when these difficulties are borne in mind, and at the 
samie time it is remembered that the schedule must be simple, uni- 
form, impartial, semi-permanent, and, moreover, must be known be- 
fore, not after the consignment has been handled — is, it will be 
recognized, indeed a hopeless task. 

But it may be claimed that there is an alternative method with 
which no such accuracy is expected or desired. All that need be 
done is to take the number of units of work done, the passenger- 
miles and ton-miles, and dividing these by the aggregate expenses, 
so obtain an average figure which will give a working basis for 
all rates. But even for this less ambitious project there are insuper- 
able difficulties. The average ton-mile will link together such 
dissimilar units as one ton of coal out of a train load of 800 tons 
carried, say, 200 miles without a stop and with no auxiliary ser- 
vices, and a ton of cream cheese carried in small consignments over 
a few miles with many subsidiary services, collection, delivery, pack- 
ing, weighing, and so forth. The respective rates charged will be 
as dissimilar as the services rendered. The coal pays a very low 
rate, but the size, regularity, and easy handling of the traffic make 
it most acceptable ; the cheese traffic pays a high rate, but nof too 



RAILROAD RATES AND REGULATION 



295 



high in view of the care and work it involves. Its very small and 
variable dimensions, and the high valne of the cheese, make the 
cost of the transit an appreciable item, besides say the profits of 
the retail trader, and an addition to the price which the well-to-do 
consumer willingly if unconsciously pays. Apply such an average 
figure in defiance of all these dififering conditions, and the result 
will only be to kill the low grade traffic and to let off too lightly the 
high grade traffic, thereby seriously impairing the prosperity of the 
railway and ultimately injuring the trading public which needs its 
services. 

167. The Rate Theory of the Interstate Commerce Commission. 

BY M. B. HAMMOND. 

The tendency of the Interstate Commerce Commiission's decis- 
ions is, on the whole, towards a cost of service theory of rate mak- 
ing. The following is an attempt at the task of so stating a theory 
of rates as tO' bring in the various considerations which the Com- 
mission has emphasized as factors in rate making, and show how 
they can be related to the fundamental principle. It is perhaps well 
to say that nowhere has the Commission undertaken tO' state such a 
comprehensive theory of rate making. 

1. In any system of government-made or government-regulated 
railway rates, it wold seem, that this fundamental economic principle 
should be kept in mind :-to perform the service of transporting per- 
sons and goods with the least possible expenditure of social energy. 

2. One transportation route or one transportation system 
should never be allowed to take fromi another route or system, 
merely as a consequence of competition, traffic which the latter route 
or system can carry at less expense. 

3. Rates should be so' adjusted as never to take from a place 
its natural geographical advantages of location; but natural advan- 
tages should not be sO' construed as to mean monopoly privileges. 

4. Railway rates as a whole should just cover costs as a whole 
allowing for a normal rate of return on capital actually invested, 
a normal return for labor of all sorts, and for depreciation, but not 
for betterments. This would not mean that superior efficiency in 
railway manageroent was not entitled to- reap the rewards of its 
superiority in the same way it does in the ordinary industrial es- 
tablishment where competition rules. On the other hand, the rule 
must not be construed to- mean that any investment in a railroad, 
no matter how foolishly or recklessly made, is entitled to exact high 



296 READINGS IN ECONOMIC PROBLEMS 

rates from persons and industries along- the line in order to earn 
current interest rates or dividends. Railway property is not more 
sacred than other property, nor are railway investors immune from 
the consequences of their own acts. 

5. Each commodity transported should, as far as possible, be 
made to defray its own share, not only of operating and terminal 
costs, but also of the fixed costs and dividends. It is possible under 
modern accounting methods to determine these costs with an ap- 
proximate degree of accuracy for the principal commodities and 
classes of traffic. The rates on other commodities may be deter- 
mined by comparing their ascertainable costs with those of the 
principal commodities, and to a lesser extent by a comparison of 
the relative values of the commodities. 

6. Differences in distance may be made a test of the reason- 
ableness of differences in rates where other conditions appear to 
be similar; yet the general rule must be kept in mind that though 
the aggregate charge should increase as distance increases, the ton- 
mile rate should decrease. 

7. Where the application of none of the above principles seems 
practicable, competition, which has been conducted in a normal 
manner over a period of several years, may be assumed to have es- 
tablished a fair relation of rates. 

8. A reasonable rate is one which yields a reasonable compen- 
sation for the service rendered. If a given rate is reasonable in 
this sense, an increase in the price of the commodity or in the 
profits to the producer will not be a valid excuse for increasing the 
railway rate. The carrier will justly share in the increased pros- 
perity of the producer by securing a larger traffic in this com^ 
modity. 

The possibility of applying these rules to the business of rail- 
way transportation is proved by the fact that the application of 
every one of them can be shown by illustrations taken from the 
Commission's decisions. Their consistent application would mean 
that the railroads would neither tax the industries of the country 
nor have their own investments sacrificed ; they would not build 
up one place of industry; they would not take from^ some persons 
or commodities their proportionate share of "the costs of transpor- 
tation and impose them upon other persons and commodities ; and 
finally they would not by their system oi rate making retard indus- 
trial progress or have their own development hindered by failing 
credit or lack of revenue. 



RAILROAD RATES AND REGULATION 297 

H. THE THEORY OF RAILROAD VALUATION. 
168. Market Value as a Basis for Rates. 

BY ROBERT H. WRITTEN. 

The theory that rates should be based upon market value would 
allow the railroads a return on monopoly value from^ favorable 
location. Such a monopoly value is not usually claimed for utili- 
ties. It is somewhat similar tO' the claim that location in the city 
streets under a franchise can be capitalized for rate valuation pur- 
poses, A closer parallel, however, is the case of a water supply 
plant that has secured the most economical source of supply. It is 
inconsistent with what is believed to be the governing principle O'f 
justice and equity which forms the basis of public service control, 
that rates should be increased, in order to pay a return on the 
capitalized value Oif exclusive location or other monopoly advantage 
that represents no actual investment. A railroad exercises the right 
oi eminent domain to secure its location and the right of eminent 
domain can only be lawfully exercised for a public purpose. The 
location secured by this method for a public purpose cannot justly 
create a monopoly that will be capitalized against the very public 
purpose that it was intended to serve — the transportation of freight 
and passengers. 

By the above method rates are based on cost, but not necessarily 
on the cast of the road itself, but in many cases on the cost of a 
competing or hypothetical road. Market value has nothing to do 
with the rate question as thus considered. It is only set up after 
the rates are in fact determined. To be sure, the theory is that rates 
are based on a fair return on the market value of the road under 
reasonable rates. The impo'ssibility of basing reasonable rates on 
a market value that is itself determined by reasonable rates is appar- 
ent. It is a clear case of reasoning in a circle. We have the evi- 
dent absurdity of requiring the answer to the problem 'before we 
can undertake its solution. Market value is not reaUy a part of 
the process but the final result. It includes in many cases a cap- 
italization oi certain monopoly profits and the monopoly value thus 
created is set up as justifying the higher rates which have in fact 
created the monopoly value. 

169. Physical Valuation as the Basis of Rates. 

BY SAMUKI. O. DUNN. 

In recent years a new theo'ry of the proper way to ascertain the 
reasonableness of rates has gained wide acceptance. Many believe 
that the railways of this country are overcapitalized. They think, 



298 READINGS IN ECONOMIC PROBLEMS 

therefore, that the return on their capitalization is not a criterion 
of the reasonableness of their rates. The sole true criterion, they 
believe, is a "fair return" on the "fair value" of the properties of 
the railways; a "fair return" is the current rate of interest; and 
therefore the government should make a valuation of the properties, 
and in future so regulate rates as to- restrict net earnings to the 
current rate of interest on this valuation. 

Many believe that large amounts of net earnings, that legally 
might have been paid out to the stockholders, have instead been 
invested in the properties. The properties also, contain a large 
amount of so-called "unearned increment." It is argued that, as 
railways are public service corporations, their owners are not en- 
titled to receive a return on those parts of their value which have 
been created by the investment of earnings or by increases in the 
value of real estate caused by the industrial development of the 
country. 

The owners and managers contend, on the other hand, that in 
any estimate that may be made of the value of the properties on 
which a return should be allowed to be earned, every factor enter- 
ing into their present value should be considered. The net earn- 
ings, they say, belong to- the stockholders. They may either invest 
them or pay them out as dividends ; and where they have chosen 
to invest them the value thereb}^ added belongs to^ them. They 
also own the real estate used for railway purposes as , absolutely — 
so long as it is used for railway purpose- — as the farmer owns his 
farm ; and therefore they have the same right, it is said, to profit 
by increases in its value. 

From a legal standpoint the spokesmen for the railways seem 
to have the better of the argument. The fifth and fourteenth 
amendments to the Federal Constitution prohibit the Nation and 
the States from taking private property for public use without due 
process of law and just compensation. When the railway, in the 
exercise of the power of eminent domain, takes the farmer's land, 
these provisions are construed to mean that it must pay him for it 
— not what it cost him — but its reasonable market value at the time 
that it is taken. A similar construction of the same provisions as 
they apply to railways would require that rates should be so regu- 
lated as to enable the railways to earn a return on the value of their 
properties at the time that the rates are being regulated, however 
the value may have been created. For if the rates were so regulated 
as to disable the company from earning a return on any part of the 
value of its property this would be, in efifect, to take so much of 
its value. 



RAILROAD RATES AND REGULATION 299 

Any plan for valuation, other than present value is indefensible. 
Cost of reproduction is no exception. It costs on the average from 
one and one-third to three times as much to get land for railway 
as for other purposes. This is because its acquisition and use for 
railway purposes involve damage tO' adjacent property which must 
be paid for, and because land that is directly in the path of a com- 
ing railway attains a monopoly value. The Railroad Commission 
of Minnesota, in making its valuation of the railways of that state, 
held that the appraisal of railway land should be based on the 
value of adjacent land used for other purposes. 

But how, railway men ask, can what the farmer would have to 
pay for land properly be used as a factor in estimating what it 
would cost to reproduce the railway? Suppose that adjacent farm 
land were worth $100 an acre; that the valuation of an established 
railway were made on this basis ; and that afterward there was 
built a new and competing line, to which the actual cost of land was 
$200 an acre. The competitive rates 011 competing railways must 
be the same. If the rates of the older railway were tO' be so fixed 
as to restrict it to a return on $100 an acre, the new railway would 
have to meet them and might thereby be deprived of the opportunity 
to earn a return on part of its actual investment. This would tend 
to discourage new railway construction. 

The Railroad Commission of Washington met a situation simi- 
lar to this when it made its valuation of the railways of that state. 
The Northern Pacific, many years ago, acquired land for extensive 
terminals on Puget Sound at a low price. The Harriman lines 
recently built to Puget Sound, and because of the increase in the 
value of land had to pay very much more for it. The two systems 
were competitors, and had to make the same competitive rates. To 
have based the valuation of the Northern Pacific's land on its orig- 
inal cost, or on its estimated value for other than railway purposes, 
might have prevented the Harriman lines from earning a fair re- 
turn on the actual cost of their land. The Commission, therefore, 
based the valuation of the land of both roads on its present esti- 
mated cost of acquisition for railway purposes. 

Another important point in estimating the cost of reproducing 
the physical plants of railways is what deduction should be made 
for depreciation, and what addition should be made for apprecia- 
tion, in the value of their various parts. The moment a rail or tie 
is laid, or a signal tower or station is finished, it begins to deterior- 
ate, owing to use, and the ordinarily insidious, but often violent, 
ravages of the elements. But while the depreciation is going on 
there is also appreciation going on. As soon as a new line is fin- 



300 



READINGS IN ECONOMIC PROBLEMS 



ished maintenance forces are put to^ work, if it is well managed, 
which limit the depreciation that takes place by making constant 
repairs and renew-als. If a deduction from the cost of reproduction 
should be made because oi depreciation, an addition to it should be 
made because of appreciation. 

According to the widely accepted theory, as soon as an estimate 
of the cost of physical reproduction is finished, we should go ahead 
and so regulate rates on a road as to limit each carrier to the same 
return. Pint is such an estimate a valuation? Indubitably, other 
things being equal, a railway having a good physical plant is more 
valuable than one having a poor one. But, surely, the estimated 
cost of reproducing a railroad's plant is not the value of the plant ; 
and the value of the plant is not the value of the railroad. 

A railway through mountainous country might be more expen- 
sive to reproduce than one built through easy prairie country ; but 
the latter's plant may be the more valuabde, simply because it is the 
better machine for rendering transportation. 

Again, of two roads having equally good physical plants, that 
having the larger net earnings is plainly the more valuable. Now, 
net earnings do not depend solely on rates. They are the margin 
between gross earnings and operating expenses. Gross earnings 
depend not only on the rates charged, but on the nature and density 
of traffic. These, in turn, result largely from the energy and skill 
used by the traffic department oi the railway in attracting popula- 
tion to its lines, teaching the farmers how tO' increase the produc- 
tivity of the soil, securing the opening of mines and the location of 
factories, and so adjusting rates as to enable producers in the terri- 
tory to compete successfully in the markets of the entire country 
and of the world against the producers in other sections and coun- 
tries. Whether operating expenses shall be high or low in propor- 
tion to gross earnings depends on the enterprise and skill used by 
the management in reducing the grades and eliminating the curva- 
ture in track, in enlarging terminals, developing esprit de corps 
among officers and employees, increasing shop efficiency, augment- 
ing tonnage per car and per train load, and in a hundred other ele- 
ments of good management. A road whose traffic is large and 
whose operating expenses are relatively small obviously would have 
larger net earnings, and, therefore, be a more valuable property 
than a road on which the traffic is relatively small and the operating 
expenses relatively high, on any basis of rates whatever that might 
be applied on both. 

Large traffic and relatively low operating expenses are strong 
evidences of good management. If valuation were based entirely 



RAILROAD RATES AND REGULATION 301 

on the cost of physical reproduction, and the net earniings of each 
road could be, and were, limited to the same amount, the better 
managed roads would be deprived of the fruits of their gfood man- 
agement. 

As a matter of fact, such regulation probably would be entirely 
impracticable; for the competitive rates on different roads must be 
the same; and, owing to the differences in density of traffic and 
operating expenses, nO' two roads charging the same rates could 
be made tO' earn the same percentages on their valuations.. 

170. The "Railway- Value" of Land. 

BY JUSTICE CHARLES H. HUGHES. 

It is manifest that an attempt to estimate what would be the 
actual cost of acquiring the right of way if the railroad were not 
there is to indulge in mere speculation. The railroad has long been 
established ; to it have been linked the activities of agriculture, in- 
dustry, and trade. Communities have long been dependent upon 
its service, and their growth and developmient have been conditioned 
upon the facilities it has provided. The uses of property in the 
communities which it serves are to a large degree determined by 
it. The values of property along its line largely depend upon its 
existence. It is an integral part of the communal life. The assump- 
tion of its non-existence, and at the same time that the values that 
rest upon it remain unchanged, is impossible and cannot be enter- 
tained. The conditions of ownership of the property and the 
amounts which would have to be paid in acquiring the right of way, 
supposing the railroad to be removed, are wholly beyond reach of 
any process of rational determination. The cost-of-reproduction 
method is of service in ascertaining the present value of the plant, 
when it is reasonably applied and when the cost of reproducing the 
property may be ascertained with a proper degree of certainty. But 
it does not justify the acceptance of results which depend upon mere 
conjecture. 

The question is whether, in detennining the fair present value 
of the property of the railroad company as a basis of its charges to 
the public, it is entitled to a valuation of its right of way not only 
in excess of the amount invested in it, but also in excess of the 
market value of contiguous and similarly situated property. For 
the purpose of making rates, is its land devoted tO' the public use 
to be treated (irrespective of improvements) not only as increasing 
in value by reason of the activities and general prosperity of the 
community, but as constantly outstripping in this increase all neigh- 
boring lands of like character, devoted to other uses? If rates laid 



302 READINGS IN ECONOMIC PROBLEMS 

by competent authority, state or national, are otherwise just and 
reasonable, are they to be held to be unco-nstituitional and void be- 
cause they do not permit a return upon an increment so- calculated ? 

It is clear that in ascertaining the present value we are not limit- 
ed to the consideration of the amount of the actual investment. If 
that has been reckless or imrprovident, losses may be sustained 
which the community does not underwrite. As the company may 
not be protected in its actual investment, if the value of its property 
be plainly less, so- the making of a just return for the use of the 
property involves the recognition of its fair value if it be more 
than its cost. The property is held in private ownership, and it is 
that property, and not the original cost of it, of which the owner 
may not be dep'rived without due process of law. But still it is 
property employed in a public calling, subject to governmental reg- 
ulation, and while, under the guise of such regulation, it may not 
be confiscated, it is ecjually true that there is attached to its use the 
condition that charges to the public shall not be unreasonable. And 
where the inquiry is as to the fair value of the property, in order 
to determine the reasonableness of the return allowed by the rate- 
making power, it is not admissible to attribute to the property 
owned by the. carriers a speculative increment of value, over the 
amount invested in it and beyond the value of similar property 
owned by others, solely by reason of the fact that it is used in the 
public service. That would be to disregard the essential conditions 
of the public use, and tO' make the public use destructive of the 
public right. 

The increase sought for "railway value" in these cases is an 
increment over all outlays of the carrier and over the values of 
similar land in the vicinity. It is an increment which cannot be 
referred tO' any known criterion, but must rest on a mere expression 
of judgment which finds no proper test or standard in the transac- 
tions of the business world. 

Assuming that the company is entitled to a reasonable share in 
the general prosperity of the communities which it serves, and thus 
to attribute to its property an increase in value, still the increase so 
allowed, apart from any improvements it may make, cannot properly 
extend beyond the fair average of the normal market value of land 
in the vicinity having a similar character. Otherwise we enter the 
realm of mere conjecture. We therefore hold that it was error to 
base the estimates of value of the right of way, yards, and terminals 
upon the so-called "railway value" of the property. The company 
would certainly have no ground of complaint if it were allowed a 
value for these lands equal to the fair average market value of sim- 
ilar land in the vicinity. 



VII. 
THE PROBLEM OF THE TRUSTS. 

A. THE INEVITABLENESS OF MONOPOLY. 
171. Monopoly, the Result of Natural Growth. 

BY GEORGE GUN TON. 

Many people talk about trusts as if they were a sudden creation, 
the product of a conspiracy against the public. Nothing' could be 
farther from the truth than this view. The history of trusts is 
simply the history of the continuous and almost imperceptible ten- 
dency in progressive society toward a greater centralization of cap- 
ital which the most highly developed labor-saving methods of pro- 
duction make necessary. The impeachniient of trusts as economic 
institutions is therefore the impeachment of the concentration of 
capital, without which, it is needless to say, our great railroad, tele- 
graph, and factory systems would have been impossible. Very few 
of the industries which use the most approved methods and have 
contributed most to cheapening the multitude of products can now 
be conducted with a capital of less than a million dollars; many of 
them require tens and even hundreds of millions. A hundred or 
even fifty years ago, a millionaire might have been regarded with 
as much apprehension as is a hundred-millionaire today ; indeed, he 
would have sustained about the same relation to the productive 
needs and methods of the community. The truth is that in this 
case, as in the growth of all social institutions, the new form came 
because it was necessary. The small English water-wheel factory 
on the river bank, in the eighteenth centur}^, came because the iso- 
lated hand-loom! and spinning-wheel did not permit the utilization of 
the most economic methods after the spinning- jenny and spinning- 
frame were invented. The steam-driven factory in thickly popu- 
lated centers came in the first quarter of the nineteenth century 
because the water-wdieel shops were incapable of employing the best 
methods after the invention of steam and the power-loom had been 
completed. If these had not been capable of lessening the cost of 
production and so rendering a general benefit to the community, 
they could not have succeeded, as there would have been no demand 
for their products. So-, again, by the middle of the century, when 
machinery had been still further improved, partnership organization 



304 READINGS IN ECONOMIC PROBLEMS 

of industr}' became necessaty because single individuals were not 
rich enough to furnish plants sufficiently large tO' employ profitably 
the most improved methods. 

With the cheapening of products and the increased consumption 
which followed the use of these successive improvements, and the 
consequent social advance of the community, a revolution in the 
methods of distribution and international (*ommiuoication became 
necessary. Inventions multiplied, which so enlarged the industrial 
world as to render corporations necessary in order to- obtain the 
best economic results. Modern trusts are but a single step farther 
in the same direction. They are simply the organization of corpor- 
ations in the same way that corporations were the organization of 
individual capitalists. 

Trusts, instead of being sudden monopolistic creations that have 
been sprung on the community by a few designing conspirators, are 
but the last link in an industrial chain more than a century long; 
they are no more revolutionary than any one of the previous links, 
and less so than some of the earlier ones. Each one O'f these links 
in the great chain of industrial evolution came and stayed only be- 
cause it was more profitable than its predecessors to those who em- 
ployed it, lessened the cost O'f production, and served the community 
more cheaply. Had it not done this, it could not have sustained 
itself in competition with the old methods. 

172. Monopoly, the Result of Artificial Conditions. 

EY W^OODRO'W WILSON. 

Gentlemen say, they have been saying for a long time, that trusts 
are inevitable. They say that the particular kind of combinations 
that are now controlling our economic development caine into exist- 
ence naturally and were inevitable ; and that, therefore, we have to 
accept them as unavoidable and administer our development through 
them. They take the analogy of the railways. The railways were 
clearly inevitable if we were to have transportation, but railways 
after they are once built stay put. You can't transfer a railroad at 
convenience ; and you can't shut up one part of it and work another 
part. It is in the nature of what economists, those tedious persons, 
call natural monopolies ; simply because the circumstances of their 
use are so stiff that you can't alter them. 

I admit the popularity of the theory that the trusts have come 
about through the natural development of business conditions in 
the United States, and that it is a mistake to try to oppose the pro- 
cesses by which they have been built up, because those processes 



THE TRUST PROBLEM 305 

belong to the very nature of business in our time, and that therefore 
the only thing we can do is to accept them as inevitable arrange- 
ments and make the best out of it that we can by regulation. 

I answer, nevertheless, that this attitude rests upon a confusion 
of thought. Big business is no doubt to a large extent necessary 
and natural. The development of business is inevitable, and, let 
me add, is probably desirable. But that is a very different matter 
from the development of trusts, because the trusts have not grown. 
They have been artificially created ; they have been put together, 
not by natural processes, but by the will, the deliberate planning 
will, of men who were more powerful than their neighbors in the 
business world, and who- wished tO' make their power secure against 
competition. The trusts do not belong to the period of infant in- 
dustries. They are not the products of the time, that old laborious 
time, when the great continent we live on was undeveloped, the 
yomig nation struggling to find itself and get upon its feet amidst 
older and more experienced competitors. They belong toi a very 
recent and very' sophisticated age, when men knew what they wanted 
and knew how to get it by the favor of the government. 

Did you ever look into^ the way a trust was made? It is very 
natural, in one sense, in the same sense in which human greed is 
natural. If I haven't efficiency enough to beat my rivals, then the 
thing I am inclined to do' it to get together with my rivals and say : 
"Don't let's cut each other's throats; let's combine and determine 
prices for ourselves ; determine the output, and thereby determine 
the prices ; and dominate and control the market." That is very 
natural. That has been done ever since f reebooting was established. 
That has been done ever since power was used to establish control. 
The reason that the masters of combination have sought to shut 
out competition is that the basis of control under competition is 
brains and efficiency. I admit that any large corporation built up 
by the legitimate processes of business, by econo^my, by efficiency, 
is natural; and I am not afraid of it, no matter how big it grows. 
It can stay big only by doing its work more thoroughly than any- 
body else. And there is a point of bigness where you pass the limit 
of efficiency and get into the region of clumsiness and unwieldiness. 
You can make your combine sO' extensive that you can't digest it 
into a single system,; you can get so many parts that you can't as- 
semble them as you would an eflfective piece of machinery. The 
point of efficiency is overstepped in the natural process of develop- 
ment oftentimes, and it has been overstepped many times in the 
artificial and deliberate fo^rmiation of trusts. 



3o6 READINGS IN BCONOMIC PROBLEMS 

A trust is foTmed in this way: a few gentlemen "promote"' it— 
that is to say, they get it up, being given enormous fees for their 
kindness, which fees are loaded on to the undertaking in the form 
of securities of one kind or another. The argument of the pro- 
moters is, not that every one who comes into the combination can 
carry on his business more efficiently than he did before; the argu- 
ment is : we will assign to you as your share in the pool twice, three 
times, four times, or five times what you could have sold your bus- 
iness for to an individual competitor who would have tO' run it on 
an economic and competitive basis. We can afford to buy it at 
such a fig'ure because we are shutting out competition. 

Talk of that as sound business? Talk of that as inevitable? It 
is based upon nothing except power. It is not based upon efficiency. 
It is no wonder that the big trusts are not prospering in proportion 
to such competitors as they still have in such parts of their business 
as competitors have access to ; they are prospering freely only in 
those fields to which competition has no' access. Read the statistics 
of the Steel Trust, if you don't believe it. Read the statistics of 
any trust. They are constantly nervous about competition, and they 
are constantly buying up new competitors in order to narrow the 
field. The United States Steel Corporation is gaining in its supreme 
acy in the American market only with regard to the cruder manufac- 
tures of iron and steel, but wherever, as in the field of more ad- 
vanced manufactures of iron and steel, it has important competi- 
tors, its portion of the product is not increasing, but is decreasing, 
and its competitors, where they have a foothold, are often more 
efficient than it is. 

Why? Why, with unlimited capital and innumerable mines and 
plants everywhere in the United States, can't they beat the other 
fellows in the market? Partly because they are carrying too much. 
Partly because they are unwieldy. Their organization is imperfect. 
They bought up inefficient plants along with efficient, and they have 
got to carry what they have paid for, even if they have to shut some 
of the plants up -in order to make any interest ou the investments ; 
or, rather, not interest on their investments, because that is an in- 
correct word, — on their alleged capitalization. Here we have a lot 
of giants staggering along under an almost intolerable weight of 
artificial burdens, which they have put on their own backs, and con- 
stantly looking about lest some little pigmy with a round stone in a 
sling may come out and slay them. 



THE TRUST PROBLEM 307 

B. CONDITIONS FAVORING THE GROWTH OF 
MONOPOLIES. 

173. The Conditions of Monopolization. 

BY A. C. PIGOU. 

First, other things being equal, circumstances, which make it 
structurally economical for the typical individual establishment to 
be large, pro tanto, increase the likelihood that a single seller will 
market a considerable part of the aggregate output of his industrial 
field; for, such circumstances necessarily increase the probability 
that a single establishment will market a considerable part of that 
output. Whether any single establishment will become big enough, 
relatively to the whole of an industry, to procure an element of 
monopolistic power depends on the general characteristics of the 
various industries concerned. Such an event is more than usually 
likely in the case of industries concerned with fancy g'oods liable 
to become "specialties." When this is so, an individual seller may 
supply a considerable proportion of his own minor market, without 
himself being of very great size absolutely. In the case of a few 
peculiar industries, amiong those concerned with staple goods and 
services, it may also well be that the prospect of internal economies 
will lead to the evolution oi single establishments large enough to 
control a predominant part of the whole output of the industry. 
The most obvious instance of this is afiforded by the industry of 
railway transportation along any assigned route. In view of the 
great engineering cost of preparing a suitable way, it will, obviously, 
be much less expensive to have one or, at most, a few railways pro- 
viding the whole of the transport service between any two^ assigned 
points than to have this ser\nce undertaken by a great number of 
railways, each performing an insignificant proportion of the whole 
service. Similar remarks hold good of the industries of furnishing 
water, gas, electricity or tramway service to a town. 

In the general body oi industries concerned with staple goods 
and services, the circumstances peculiar tO' railways and the allied 
industries are not reproduced. Internal economies reach the limit 
long before the individual establishment has grown tO' any appre- 
ciable fraction of the whole industrial field relevant to it. When 
this is the case, internal economies obviously cannot be responsible 
for monopolistic power. 

Secondly, other things being equal, circumstances which make it 
structurally economical for the typical individual unit of business 
management to be large, pro tanto, increase the likelihood that a 



3o8 READINGS IN ECONOMIC PROBLEMS 

single seller will market a considerable part of the aggregate out- 
put of his industry. This proposition has, in recent times, become 
of predominant importance. 

Much has been made by some writers of the fact that, when a 
number of parallel esta:blishments are grouped under a single head, 
the different plants can be thoroughly specialised to particular 
grades of work ; and of the other kindred fact that the orders in 
any place can be met from the plant nearest to- that place, and that, 
thus, cross freights are saved. It does not appear, however, that a 
single control over many separate establishments is necessary in 
order to secure these economies. Even though the different estab- 
lishments were to remain separate, the industrial organism would 
lend, under the sway of ordinary economic motives, to evolve them. 
Nor does it appear that those economies in respect of marketing, 
which some writers ascribe to large-scale control, are of great im- 
portance. 

Nor, again, should much importance be attached to those ad- 
vantages of large-scale management such as concentration of office 
work, provision of central warehouse for goods, centralisation of 
insurance and banking, establishment of a uniform system of ac- 
counts, and SO' forth. For these econoimies are scarcely practicable 
at all under the lower types of price-fixing cartel, which is common 
in Germany, and, even in fusions and holding companies, are very 
soon outweighed by the immense difficulty of finding people compe- 
tent properly to manage very large businesses. 

There are, however, certain structural economies of large-scale 
management, which are of a different order and have a wider reach. 
A business combining many establishments is, in general, in con- 
tact with a number oi different markets, in which the fluctuations 
of demand are, in some measure, independent. It follows that the 
operation of such a business involves in the aggregate less uncer- 
tainty-bearing than the operation of its parts would involve if they 
were separated. The general economy resulting from this fact may 
manifest itself in the greater facility with which loans can be ob- 
tained, or in the lower price charged for them, or in the smaller 
proportionate reserve fund that the concern needs. The larger the 
unit of individual control, the larger is this economy. After a point, 
indeed, its growth, as the unit grows, becomes exceedingly slow. 
But, until the unit has reached a very large size^ it grows rapidly, 
and constitutes a powerful force making for larger units. One 
further point may be mentioned. In certain special cases, large- 
scale control achieves an indirect economy by reducing the prob- 
ability that such fluctuations will occur. It does this in fields of 



THE TRUST PROBLEM 



309 



work where public confidence is of importance, and where large- 
ness of capital resource is calculated to create such confidence. 
These conditions are fulfilled in the case of banks. 

So far, we have considered exclusively what I have called struc- 
tural economies. There is also another sort of economy that, in 
certain circumstances, favours the growth of large-scale manage- 
ment. So long as a field of industry is occupied by a number of 
establishments separately controlled, expenditure is likely to be in- 
curred by all in defending their market against the others. A large 
part of the expenditure made in respect of advertisements and of 
travelers is of their character. But, when, instead of a number of 
competing finnis, there appears, in any portion of am industrial field, 
a number of firms under a single authority, a great part of this ex- 
penditure can be dispensed with. If united, the railroads could save 
vast sums spent in canvassing against each other. The economy is, 
of course, liable to be largest where, apart from unification, ''com- 
petitive" expenditure would be largest, namely, not in staple indus- 
tries providing easily recognized standard articles, but in various 
sorts of "fancy" trades. 

Let us next suppose that the size of the individual firm and the 
size of the individual unit of management in an industry have been 
adjusted to the structural and other economies obtainable, and that 
the units evolved in this way are not large enough tO' exercise any 
element of monopolistic power. In this case, it is clear that monop- 
olistic power will not be called into being incidentally. But when 
promoters have reason to believe that the speculative community 
will think a particular monopoly likely to prove more profitable 
than it really will do, this fact promises extra gains to those who 
form amalgamated companies, because it enables them to^ unload 
their shares at inflated values. Apart from this, however, the mag- 
nitude of the gains obtainable from monopolisation depends on the 
elasticity of the demand for the commodity concerned. The less 
elastic this demand, the greater are the probable gains. 

The first condition is that the commodity shall be of a kind for 
which it is not easy to find convenient substitutes. The demand for 
mutton is made comparatively elastic by the existence of beef, the 
demand for oil by the existence of gas, and the demand for the 
service of trains by the existence of omnibuses. As regards the 
kinds of commodity, little of general interest can be said. It should 
be observed, however, that the products of a district, or a country. 
whose efforts are directed tO' leadership in quality, as distinguished 
from quantity, are less exposed to the competition of substitutes 
than other products. It is, therefore, a commercially important fact 



3IO 



READINGS IN ECONOMIC PROBLEMS 



that English manufacturers enjoy a very marked leadership of 
quality in respect of wall-papers, fine textiles, and cables, whereas, 
in the electrical and chemical industries, they are in a decidedly in- 
ferior position. Obviously, from the present point oi view, we must 
include among the substitutes for any commodity produced by a 
monopolist the same commodity produced by other sellers. The 
larger, therefore, is the proportion of the total output of product 
that a monopolist provides in any market, the less elastic the de- 
mand for his services will be. Inelasticity of demand for monopoly 
goods is, therefore, promoted in industries where importation from 
rival sources is hindered by high transport charges, high tariffs, 
or international agreements providing for the division of the field 
between the combined producers of different countries. Further- 
more, in order that the elasticity of demand may be affected by 
substitutes, it is not necessary that the rival source of supply should 
be actually existing. In some cases, mianufacture by people who 
are normally purchasers is itself a possible ' rival source of supply. 
The poor housewife has the power, if reason offers, to do her own 
sewing and laundry. Consequently, the demand for the services 
of specialists at such tasks is exceptionally elastic. For example, it 
has been remarked of Binningham : "The washerwomen are among 
the first to suffer in any period of trade depression, for, as the first 
economy in bad times is to do your own washing, the tiny laundry 
with a very local connection is soon emptied." 

The second condition, making for inelasticity of demand, is that 
a commodity shall give rise to only a small proportion of the total 
cost of any further commodities, in the production of which it may 
be employed. The reason, of course, is that, when the proportion 
is small, a large percentage rise in the price of the commodity, with 
which we are concerned, involves only a small percentage rise in the 
price of these further commodities, and, therefore, only a sm.all 
percentage contraction of consumption. 

The third condition is that the further commodities, if any, in 
whose production our commodity is employed, shall be such that 
substitutes cannot easily be found for them. Thus, the raw mate- 
rials of the building trade should be subject to a less elastic demand 
than those of the engineering trade, because foreign machines can 
compete with English machines much more easily than foreign 
houses can compete with English houses. 

The last condition is that the other commodities or services, that 
cooperate with our commodity in the making of a finished product, 
shall be easily "squeezable," or, in technical language, shall have 
an inelastic supply schedule. 



THE TRUST PROBLEM 311 

The preceding considerations suggest that units of control ade- 
quate to exercise monoipolistic power will often be found, even 
though neither structural economies nor advertisement economies 
dictate their formation. The tendency towards this result is op- 
posed, in many instances, by the difficulty and cost involved in 
bringing about agreements among competing sellers. This difficulty 
and cost depend upon the following general circumstances : First, 
combination is easier when the number of sellers concerned is small 
than when it is large ; for small numbers both facilitate the actual 
process of negotiation, and diminish the chances that some party 
to an agreement will subsequently violate it. Secondly, combination 
is easier when the various producers concerned live fairly close to 
one another, and so can come together easily, than v;hen they are 
widely scattered. The reason why combination prevails in the 
German coal industry, and not in the English, is partly that, in 
Germany, the production of coal is localized, and not spread over a 
number of different districts, as it is in this country. A similar 
reason probably accounts, in great measure, for the excess of com- 
bination that appears among sellers in general, as compared with 
buyers in general ; for, it may be observed that at auctions, where 
buyers also are closely assembled, combination among them is not 
infrequent. Thirdly, comlbinatioii is easier when there is a certain 
unifomiity about the product of the various firms concerned. Dr. 
Levy suggests that one reason why English firms are combined to a 
less extent than foreign firms is that they concern themselves, as 
a rule, with the higher qualities, and the more specialized kinds, of 
commodities, rather than with "mass goods." Fourthly, combina- 
tion is easier when the tradition and habit of the country is favour- 
able, than when it is unfavourable, to joint action in general. 

174, Efficiency, Large-Scale Production versus Monopoly. 

BY CHARI^ES J. BULLOCK. 

In favor of the proposition that the tendency of large-scale 
production is to^ pass over into monopoly, three general lines of 
argument may be distinguished: (a) the contention that a con- 
solidated enterprise possesses advantages over independent com- 
panies in producing and marketing its goods; (b) the claim that 
mere mass of capital confers powers of destructive warfare so great 
as to deter possible competitors from entering the field; (c) the 
belief that modern competition between large rival establishments, 
representing heavy investments of fixed capital, is injurious tO' the 
public, ruinous tO' the producers, and in its final outcome self-de- 



3 1 2 READINGS IN ECONOMIC PROBLEMS 

structive. As our discussion proceeds it will become evident to the 
reader that all of these arguments can be employed, with consist- 
ency, only by those who believe that the competitive regime is to 
be replaced by an era of monopoly. 

First in this list is the contention that a consolidated concern 
is a more efficient agent o^f production and exchange. Thus it is 
claimed that trusts, by filling orders from the nearest plant, can 
effect a great saving in cross-freights. Data upon .this question are 
available in the recent Bulletin of the Department of Labor. Of 
the forty-one combinations reporting, twenty-seven failed to answer 
this question, nine claimed a saving fro-m this source, and five 
stated that there was no' gain. Of the nine reporting a saving, 
the Bulletin states the amount only in three cases ; and in two of 
these the item of cross-freights was combined with other econoniies, 
the aggregate sumis being $400,000 and "considerably over 
$500,000." This, be it remembered, is the trusts' own showing, 
and is certainly not an underestimate. The reason for these com- 
paratively small results is not difficult to discover. When the mon- 
opolized product is of a bulky sort, the industry is already localized 
pretty thoroughly before combination takes place; and, since most 
of the former independent establishments vv^ere producing chiefly 
for their natural local constituencies, the trust can save little in 
cross-freights. When, however, the product is light, transportation 
charges become a matter of small moment. In either case the room 
for saving in cross-freights is not nearly as large as has been repre- 
sented, while Oiften it does not exist. 

Then it is urged that a trust can draw upon all the patented 
devices of the constituent companies, and employ only those that 
are most efficient. But advantages accruing from this fact will in 
most cases prove tO' be of a temporary nature, as trusts that have 
tried to base a monopoly upon the control of all available patents 
have learned in the past, and will learn in the future. Moreover, a 
simple reform in our patent laws will make the best processes avail- 
able for all producers for any time that the public finds such a 
measure to be necessary for protection against monopoly. Here, 
then, we find no natural law working resistlessly towards combi- 
nation, but a man-made device which can be regulated as public 
policy may dictate. 

Again, we are told that a trust can produce more cheaply than 
separate concerns, because all the plants utilized can be run at their 
full capacity ; whereas, under competition, many establishments can 
be kept in operation but a part of the time. Some observations may 
be made concerning this claim. 



THE TRUST PROBLEM 313 

In general, it may be denied that, whenever governmental in- 
terference has not produced unhealthy and abnormal conditions, 
competition has led to such absurdly excessive investments as is 
commonly assumed. We must concede, however, that under nor- 
mal conditions some reduction can be made in the number of plants 
required to supply the market at ordinary times ; but this does not 
dispose of the matter. If a trust is to be prepared for supplying 
the market promptly in times of rapidly increasing demand, it is 
necessary that some surplus productive capacity must exist in 
periods oi stationary or decreasing demand ; for, as believers in 
the tendency tO' monopoly often remind us, many months, or even 
one or twO' years, are required for the construction of new plants. 
When this fact is taken into account, the case will stand as follows : 
except where the action of government has produced abnormal 
conditions, the. capacity of competing establishments does not ex- 
ceed the requirements of the market to any such degree as is com^ 
monly assumed ; even a trust must provide for periods of expanding 
trade; even then, not all rival establishments suffer seriously from 
inability to find continuous employment for their plants, so that 
probably the advantages secured by the trust are of consequence 
only when the least fortunate or least efficient independent concerns 
are made the basis of comparison. 

Again, we are reminded of advantages in buying materials or 
selling products. It is urged that a combination can purchase its 
raw materials more cheaply than separate concerns. No one doubts 
that a large company can often secure better terms than a small 
establishment ; but it is not so clear that every trust can secure 
supplies more cheaply than large independent enterprises, unless 
it is true that all combinations can arbitrarily depress the prices 
of the materials which they consume. Undoubtedly, this has been 
done by some of the trusts, although their partisans deny it; but 
such a saving represents no social gain, and sometimes it may be 
possible for would-bie competitors to profit by the depressed con- 
dition of the market for raw materials. 

And, finally, we cornie tO' economies in advertising and in solicit- 
ing business, where the wastes of competition are certainly serious 
and the room for improvement correspondingly great. Those who 
deny the tendency to monopoly generally admit that a trust can 
have a material advantage here, while those who affirm the exist- 
ence of such a tendenc}^ evidently realize that their case is strong- 
est at this point. Yet an opportunity for saving in these depart- 
ments does not always exist, and the extent of the economy is easily 
exaggerated in other cases. Mr. Nettleton is right when he says: 



314 READINGS IN ECONOMIC PROBLEMS 

"But to what extent the trust organizers have counted on prac- 
tically cancelling expenditure for these two items, on the ground 
that buyers Avill be obliged to come to the sole manufacturers, they 
are likely to be surprised. To an extent which few appreciate, the 
buying public has become accustomed to being reminded of its 
needs before making purchases. Except in staple and absolutely 
necessary commodities, demand is largely created and maintained 
by advertising through periodicals, catalogues, or travelling sales- 
men. Hence, the trust that expects to save the bulk of this import- 
ant item must also expect to lose through diminished sales more 
than the economy represents. This is not theory, but the testimony 
of leading dealers in many lines." 

We must now take into account certain counteracting forces, 
upon which some writers rest their belief that competition will ulti- 
mately prevail. These economists contend, in the first place, that, 
O'Utside the field of the natural monopolies, the growth of a busi- 
ness enterprise is limited by the fact that companies of a certain 
size will secure "maximum efficiency" of investment, and that be- 
yond this point concentration brings no increase in productive ca- 
pacity. This position is based upon the belief that a factory of a 
certain size will enable machinery to be employed in the most 
advantageous manner; that a reasonable number of such plants 
will make possible all needful specialization of production ; that 
allied and subsidiary industries can be, and are, carried on by large 
independent concerns ; and that the cost and difficulties of super- 
visiom increase rapidly after a business is enlarged beyond a certain 
size, especially when it is attempted to unite plants situated in differ- 
ent parts of the country. For this reason, increased output does 
not decrease the burden of fixed charges after a company attains 
a certain' magnitude; but, on the contrary, new charges arise. 
Among such new expenses, not the least important are the cost of 
emploving the most skilled legal talent to steer the combination just 
close enough to the law, the expenses necessary for "legislative" 
and "educational" purposes, and the outlays for stifling competition 
or the continual "buying out" of would-be rivals. 

It is argued that an established monopoly will suffer actual loss 
from listless and unprogressive management. As the New York 
Journal of Commerce rightly insists, "it is not to be denied that 
such concentrations of management will be subject to countervail- 
ing offsets from the absence of the stimulus of competition ; from 
the uncertainty about the management falling into the best pos- 
sible hands; from the discouragement to invention which always 
attends monopoly, and from- the possibility that the administration 



THE TRUST PROBLBM 



315 



may be intrusted to 'friends' rather than tO' experts." As Professor 
Clark suggests, an estabhshed monopoly, secure in the possession 
of the markets of a large country "would not need to be forever 
pulling out its machines and putting in better," so that, as com- 
pared Avith countries where industry is upon a competitive basis, 
such a combination would fall behind in the struggle for interna- 
tional trade. In ruthlessly and unceasingly displacing expensive 
machinery with newer and better appliances, American manufac- 
turers have probably led the world ; but monopolies will inevitably 
feel reluctant to continue such an energetic policy of improvement. 
As combinations obtain a greater age, they will persist in old and 
established methods ; while nepotism and favoritism, tending to- 
wards hereditary office-holding will replace the energetic manage- 
ment that some of the trusts nowi display. 

Here we may refer tO' two of the alleged advantages of trusts. 
It is said that combinations develop abler management through 
the opportunity they afford for a specialization of skill upon the 
part of their ofificials, and that efficiency is increased by a compari- 
son of the methods and costs of production in the various plants. 

When it is contended that the "strength of the trust is that it 
gives the opportunity for the exercise of these highest qualities of 
industrial leadership," and that it gives us "a process of natural 
selection of the very highest order," we may question whether stock 
speculation and other causes lying outside the sphere of mere pro- 
ductive efficiency have not had more to do with the formation of 
recent combinations than demonstrated superiority in business man- 
agement. And, it may be asserted that the establishment of per- 
manent monopoly will interfere seriously with the future process 
of selection. It must be remembered that the able leaders now 
at the head of the successful trusts were developed out of a field 
which atTorded the widest opportunity for creative ability. The 
supreme qualities requisite for great industrial leadership are not 
likely to be fo'Stered by a regime which closes each important branch 
of manufactures to- new enterprise, and renders hopeless all com- 
petition with a single consolidated co^mpany. Will successive gen- 
erations of bureau chiefs or heads of departments in long-estab- 
lished corporations be able to^ continue the race of masterful leaders, 
which freedom in originating and organizing independent industries 
has given us in the present age? 

The second argument advanced to prove the tendency to mon- 
opoly is the claim that mere mass of capital confers such powers 
of destructive warfare as to deter possible competitors from en- 
tering the industry, at least until prices have long been held above 



3 1 6 READINGS IN ECONOMIC PROBLEMS 

the competitive rate. It is said that a large combination can lower 
prices below the cost of production in any locality where a small 
rival concern is established, thus driving it out of the field. With- 
out doubt the destructive competition waged by combinations is 
an important consideration, and it may well enough re-enforce mon- 
opoly where other attendant circumstances favor consolidation. But 
a monopoly based solely upon this power would be, confessedly, a 
temporary affair; for probably no one would claim that all capital- 
ists would be intimidated permanently by such circumstances. 

The final reason for the belief that combinations must ulti- 
mately prevail is found in the character of modern competition in 
these industries which require heavy investments of fixed capital. 
Under such conditions the difficulty of withdrawing specialized in- 
vestments and the losses that are entailed by a suspension of pro- 
duction make competition so intense that prices may be forced 
far below a profitable level without decreasing the output ; and in- 
dustrial depression inevitably follows. 

In support of this line of argument, it is said that trusts are 
beneficial, because they can "exercise a rational control over indus- 
try," and "adjust production to- consumption." Thus it is believed 
that commercial crises can be prevented, or, at least, that their worst 
effects can be avoided. But such arguments overlook the facts that 
a restriction placed upon production by a trust, especially if this 
is sufficient tO' raise prices above the competitive rate, may react 
injuriously upon other trades; and that monopoly profits, accruing 
to a small body of capitalists for a long period of time, must con- 
stitute a tax upon the body of the people that will affect the dis- 
tribution of v(fealth in such a way as to reduce the consuming power 
of the masses. A reduction in purchasing power thus produced 
would render excessive the existing investments in staple indus- 
tries, and produce crises. 

Not only is it doubtful whether monopoly is a wise method 
of regulating industry, hut it is certain that the evils of compe- 
tition are greatly exaggerated in some cases, while in others they 
are due to unhealthful conditions for which an interference with 
industrial freedom is responsible. In miany other industries where 
trusts have been formed, the excessive investment of which writers 
complain was caused by the undue stimulus given by high protective 
duties and by the restriction of foreign competition. Competition 
is restricted by protective duties in most of the industries where 
combinations are formed ; these duties increase the severity, and 
perhaps the frequency, of the fluctuations from which business 
suffers ; then trusts, a further restriction of freedom, are advocated 



THE TRUST PROBLEM 



317 



as a remedy for the ills caused by the initial interference with in- 
dividual enterprise; and, finally, in order to regulate the trusts, an 
elaborate system of public supervision is proposed. Would it not 
be well tO' make a genuine trial of competition before condemning 
it for producing evils which are greatly increased by governmental 
interference with industrial freedom? 

Competition cannot be proved a failure until it is given a trial. 
The evils from which many economists would seek refuge in im 
dustrial combination are greatly increased by unwise laws which 
have now outlived any usefulness that originally they may have 
possessed. If unhealthful conditions produced by our own inter- 
ference with the course of business are ever removed, competition 
will probably develop no evils which could not be borne, as vastly 
preferable to monopoly, public or private. Indeed, even as things 
are, the shortcomings of the competitive system are exaggerated ; 
and attempted monopoly is more likely in the end to increase, rather 
than mitigate, those periodic fluctuations from which industry suf- 
fers. 

175. The Causes of Trusts. 

BY CHESTER W. WRIGHT. 

We have in modern capitalistic industry tendencies toward a 
widening of the market with increased localization and integration 
and a steadily enlarging scale of production accompanied by a 
growing fierceness of competition. The larger the concerns, the 
smaller their number, the greater their resources for carrying on 
a fight, the bigger the prize which goes to the winner, and conse- 
quently the fiercer the competition and the m'ore excessive its 
wastes. Add to this the difficulties arising from the small margin 
of profit, the more complicated and prolonged industrial processes, 
the wider market, and the large use of fixed capital — and finally 
add the extra gain which comes from the pO'wer of monopoly to 
extort exorbitant prices, and one understands the forces which are 
fundamentally responsible for the modern trust movement. The 
reason for many trusts may be found in more imimediate causes, 
which, for the very reason that they are more immediate and ob- 
vious, have often appeared, to the public eye at least, as even more 
important. 

It is doubtless true that a considerable number of trusts owe 
their origin to the profits which it was expected would accrue to 
the promoter who undertook the task of organizing the trust. This 
was especiall}^ the case in the proriiotion which went on during the 
years 1898 and 1901, when the money market and other conditions 



3i8 READINGS IN ECONOMIC PROBLEMS' 

were particularly favorable ; but it is not likely that we shall soon 
see a recurrence of such an era. There can be no cjuestion, how- 
ever, that the lax corporation laws, many of which appear to have 
been especially designed to meet the promoter's needs, did enable 
him to make certain gains and to dispose of the securities put out 
at a somewhat higher price than would otherwise have been pos- 
sible. Still, it must be borne in mind that the more fundamental 
causes for the growth of trusts were really at the bottom of even 
these gains. 

Most prominent among the second group of more immediate 
causes for the growth of trusts — those which I have called special 
privileges — are railroad favors, tariff duties, and patent rights. In 
former years railroad favors of one sort or another were doubtless 
given tO' many of the trusts. From time to time announcements 
have been made that these discriminations had been abolished ; but 
frequently, as some later special investigation or prosecution re- 
vealed the facts, it has been found that they still exist. However, 
the evil is undoubtedly much less frecjuent than formerly and today 
is at best but a minor factor. The tariff is probably of more im- 
portance as an aid to the trusts, though I am inclined to believe that 
its influence has been considerably exag"gerated. Probably its chief 
eft'ect is in enabling trusts, most of which would exist in any case, 
to exact somewhat higher prices for their products than would 
otherwise be possible. It should be noted, however, that it is the 
over-protective tariff" which offers the chief incentive for the for- 
mation of trusts. It is because the duties are often so much higher 
than is necessary to- maintain the industry that overproduction en- 
sues and the domestic manufacturers are led to combine so as to 
secure the high profits made possible by the tariff. To enact duties 
of this character is to^ do^ nothing less than to offer a reward for 
forming a trust. The importance of patent rights as a basis for 
trusts probably deserves more attention than it has received. 

The third group of minor causes for the growth of trusts in- 
cludes certain methods of competition, notably factor agreements 
and discriminating prices. Under such agreements the manufac- 
turer or wholesaler may sell his product on condition that the price 
which he fixes be absolutely maintained, or on condition that the re- 
tailer shall not deal in the competing product of any rival, or per- 
haps that he shall not sell such rival product below a certain price. 
Any concern putting out a product for which there is a considerable 
demand can use this system,- especially the latter form, against its 
rivals with tremendous power and effectiveness. The practice of 



THE TRUST PROBLEM 



3»9 



discrimiiiatin,!^ prices is also a powerful weapon for building up 
and maintaining monopoly control. 

Closely connected with this is the power exercised by control 
of credit which is sometimes declared to be an important weapon 
of the trust. On this point it is impossible at present to speak 
decisively. Information is ver_v difficult to obtain and usually con- 
flicting. There is some reason to believe that a larg^e concern with 
the close financial alliances which ordinarily accompany it may oc- 
casionally find itself in a po'sition where it can control the credit 
obtainable by a rival at somie crucial moment and through the power 
thus obtained may force that rival to capitulate, often at a heavy 
loss, as in the case of the Pennsylvania Sugar Refining Company. 
There may not be a money trust but apparently there are times 
when the power of centralized control over large masses of capital 
proves of great advantage to a big corporation. 

176. English Industrial Conditions and Monopoly. 

BY HKRMANN LKVY. 

Hie development of cartels and trusts in English industries is 
restricted v/ithin narrow limits by three facts, the absence of a 
protective tariff, the comparative insignificance of freights, and the 
rarity of slowly reproduced mineral products likely to form na- 
tional or international monopolies. Manufacturers can only set 
about the monopolistic organization of an industry when it is free 
from foreign competition, owing tO' the lowness of the cost of pro- 
duction, to the manufacture of special c]ualities, to traditional dex- 
terity, or to international agreement. Even in such cases, mon- 
opoly is subject to certain conditions. On the one hand the profit 
is relatively small, coniipared with what it is in countries which are 
not without the three features mentioned above ; and on the other 
hand the industries affected are such that their materials can be 
acquired at equal or even less cost by others, whereas many of the 
most important monopolies abroad are in industries whose materials 
cannot be multiplied at will, and can be monopolized. Therefore, 
even where prices could be raised so far as foreign competition is 
concerned, a successful monopoly can only be established when, 
in the first place, the number of competing firms is relatively very 
small ; and, in the second place, when the rise of fresh competition, 
even if prices are good, is either out of the question or only to be 
expected after a considerable period. Both conditions can only 
arise under the existing industrial organization after concentration, 
England presents the curious contradiction that, in the days when 



320 READINGS IN ECONOMIC PROBLEMS 

cartels were unknown in Germany or America, she had quite a 
modern cartel in her coal trade, based on freight advantages. When 
the rest of the wodd was being satiated with cartels and trusts, 
free trade, the improvement of transit — a very important factor 
in so small a country — the transition to the preponderating produc- 
tion of manufactured goods from' imported raw materials and sim- 
ilar causes kept her from monopoly. 

In other countries commercial policy, transport facilities, the 
chance existence of slowly reproducible minerals forming na- 
tional or even world-wide monopolies, and other similar factors not 
essentially connected with the natural development of modern in- 
dustrial capitalism can cause monopoly. Its rise under such con- 
ditions is not peculiar to a certain advanced stage of capitalism. 
Like the early cartels in English coal and copper mining, and so 
many Gemian cartels and American trusts, such monopolies may 
be shortlived phenomena vanishing with the disappearance of some 
accidental or temporary condition. In England, on the contrary, the 
creation of monopoly is direcly connected with the most modern 
deevlopment of industrial capitalism, and is its logical consequence. 
The recent rise of cartels and trusts must therefore be regarded 
as essentially the pure result of that economic law which we have 
called the movement toward concentration. 

Very different would the picture be if England broke with the 
free trade system. Protection would increase the number of trades 
in which the creation of monopoly would depend solely and singly 
on the amount of home competition. A great many industries in 
which at present concentration has very largely reduced the number 
of firms, but in which foreign competition has so far prevented a 
monopolist combination, would, under a tariff, straightway be in a 
position to found cartels or trusts. As it is, many industries threat- 
ened by foreign competition now find it easier than it used to be to 
suppress home competition; and, in proportion as this is so, the 
prolDability that protection would be the last thing requisite for a 
monopoly increases. Finally, a tariff would encourage the mon- 
opolistic combination of far more firms than is now possible, be- 
cause the attraction of monopoly would grow with the possibility 
of profiting by the protective duty, and therefore monopolies would 
be conceivable in England even where little or no concentration had 
taken place. British tariff reformers are so well aware of this con- 
nection that they often desire a protective tariff simply as a means 
to creating trusts which they consider to be the most advantageous 
form O'f industrial organization. Free traders no less than tariff 
refoirmiers value the advantages O'f combination as a matter of or- 



: THE TRUST PROBLEM 321 

ganization ; but they maintain that under free trade alone can mon- 
opohst organizations produce desirable economic results. This 
opinion rests on the argument that under free trade a monopolist 
combination cannot aim at raising prices, which must sooner or later 
provoke foreign competition, but only by reducing expenses, and 
thereby increasing profits. Just because they result from concen- 
tration it is an undoubted characteristic of English cartels and 
trusts that by economies and better organization they produce es- 
pecially large reductions in the working expenses oif an under- 
taking. In many cases this may have been the chief object of the 
founders of great combines. It is admittedly a matter of very great 
difificulty to estimate the effects of English cartels and trusts on 
prices. 

In the first place, the fixing of prices exclusively by competition 
is in general superceded by a more or less entire autonomy of the 
monopolist combinations, even where there is no complete m'onopoly. 
We find it almost universally stated in the reports of trade papers 
and similar documents that monopolist combinations "raised," or 
"reduced," or "tried to maintain" prices. In other words, prices no 
longer depend merely on the results of unrestricted competition. 

In the second place, monopolist combinations usually achieve 
their avowed aim oi raising prices above competitive prices. Finally, 
monopolist combinations show their influence in the division of 
markets so characteristic of trusts and cartels in other countries. 



C. THE SOCIAL VALUE OF MONOPOLY. 

177. The Industrial Efficiency of Monopolies. 

BY George; w. perkiNvS. 

Perhaps the most useful achievement of the great corporation 
has been the saving of waste in its particular line of business. By 
assembling the best brains, the best genius, the best energy in a 
given line of trade, and co-ordinating these in work for a common 
end, great results have been attained in the prevention of waste, the 
utilizing of by-products, the economizing in the manufacture of the 
product, the expense of selling, and through better and more uni- 
form service. 

This same grouping of men has raised the standard of their 
efficiency. Nothing develops man like contact with other men. A 
dozen men working apart and for separate ends do not develop the 
facility, the ideas, the general effectiveness that will become the 



322 



READINGS IN ECONOMIC PROBLEMS 



qualities of a dozen mien working together in one cause. In such 
work emulation plays a useful part; it does all the good and none 
of the harmt that the old method oi restrictive competition did ; 
the old competition was wholly self-seeking and often ruinous, while 
the new rivalry, within the limits of the same organization, is con- 
structive and uplifting. Thus the great corporation has developed 
men of a higher order of business ability than ever appeared under 
the old conditions ; and what a value this has for the coming gen- 
eration ! 

We have heard many warnings that because of the great cor- 
poration we have been robbing the oncoming generation of its op- 
portunities. Nothing is more absurd. The larger the corporation, 
the more certain is the office boy to ultimately reach a foremost 
place if he is made of the right stuff, if he keeps everlastingly at 
it, and if he is determined to beconiie master of each position he 
occupies. 

In the earlier days, the individual in business, as a rule, left his 
business to his children. Whether or not they were competent 
did not determine the succession. But the giant corporation can- 
not act in this way. Its management must have efficiency ; and 
nothing has been more noticeable in the management of corpor- 
ations in the last few years than that "influence," so-called, as an 
element in selecting men for responsible posts, has been rapidly on 
the wane. Everything is giving way and must give way to the one 
supreme test of fitness. 

And is it not possible that the accumulating of large fortunes in 
the future may be curtailed to a large extent through the very 
workings of these corporations? Are there not many advantages 
in having corporations in which there are a large number of po- 
sitions carrying with them very handsome annual salaries, in place 
of firms with comparatively few partners — the annual profits of 
each one of whom were often so' large that they amassed fortunes 
in a few years ? A position carr^ang a salary so large as to represent 
the interest on a handsome fortune can be permanently filled only 
by a man of real ability, so that in case a man who is occupying 
such a position dies, it must, in turn, be filled with another man of 
the same order — ^while the fortune might be and most likely would 
be passed on regardless of the heir's ability. Therefore, the more 
positions of responsibility, of trust and of honor, that carry large 
salaries, the more goals we have for young men whose equipment 
for life consists of integrity, health, ability and energy. 

Furthermore, the great coTporation has been of benefit to the 
public in being able to standardize its wares, so that they have be- 



THE TRUST PROBLEM 323 

come more uniformly good. Wages are unquestionably higher and 
labor is more steadily emiployed ; for, in a given line of trade, 
handled to a considerable extent by a corporation, there are prac- 
tically no failures ; while, under the old methods of bitter, relent- 
less warfare, failures were frequent, and failure meant paralysis 
for labor as well as for capital. 

The great corporation is unquestionably making general busi- 
ness conditio'ns sounder. It is making business steadier ; because 
firms inevitably change and dissolve, while a corporation may go 
on indefinitely ; because it is able to survey the field much better 
than could a large number of firms and individuals and, therefore, 
vastly better able to measure the demand for its output and, if prop- 
erly managed, to prevent the accumulation of large stocks of goods 
that are not needed — a condition which often arose under the old 
methods when many firms were in ruthless competition with one 
another in the same line of business, oftentimes producing serious 
financial difficulties for one and all. 

Broadly and generally speaking, the corporation as we know it 
today, as we see it working and feel its results, is in a formative 
state. Tn many cases actual and desperately serious situations 
caused it to be put together hurriedly. In many cases serious mis- 
takes have been made in the forms of organization, in the methods 
of management, and in the ends that have been sought. In some 
instances the necessity for corporations has grown faster than has 
the ability of men to manage them. Yes, mistakes have been many 
and serious. But" the corporation is with us ; it is a conditioiU, not 
a theory, and there are but two- courses open to us — to kill it or to 
keep it. 

178. The Savings of Combination. 

BY the; INDUSTRIAI, COMMISSION. 

(a) Among the economies that are generally recognized as 
resulting from combination is the regulation of production. Where 
there is no general understanding among producers there is a strong 
tendency to overproduction, sO' that markets become demoralized 
and competition excessive. The combination is able so to^ fit the 
supply to the demand that while customers can be fully supplied 
at reasonable prices there is no danger of overproduction. It is 
thus a means of preventing panics and periods of depression. 

(b) Closely allied with this adaptation of supply to demand is 
the advantage that comes from the possibility of carrying much 
smaller stocks of goods. This saves not niicrely the investment of 



324 



READINGS IN ECONOMIC PROBLEMS 



capital, but also interest on running capital, insurance, storage 
charges, shop-work charges, etc. 

(c) This same control of production enables the combination 
to keep its factories running full time, thus keeping labor fully em- 
ployed. It has been found in several special cases that the per- 
centage saved in the cost of production in the rubber industry by 
running a factory full time instead of half time was from 4 to 8 
per cent. In other cases it is doubtless more. 

(d) When a large proportion of an industry is under the con- 
trol of one central management, it becomes essential tO' success that 
the various products be standardized. In this way the quality of 
goods can be made much more uniform than would otherwise be 
the case, and its excellence can be guaranteed. Furthermore, the 
number of styles of goods can be regularly very much reduced, 
thus lessening the cost of manufacture and effecting a saving in the 
amount of stock that needs to be carried. 

(e) The same influence leads to the larger use of special ma- 
chinery, and to the adaptation of the workmen and the superintend- 
ents to the special departments for which they are best suited. In 
many cases through this specialization more can be saved than 
thrO'Ugh the introduction even of new machines. In one case, in 
connection with the manufacture of rubber goods, as much as 20 
per cent of the cost was saved by thus specializing the machinery. 
Mr. Schwab, president of the United States Steel Corporation, men- 
tions the specialization and adaptation of material as a great saving 
in the steel industry. 

(f) The specialization mentioned above saves also materially 
through a lessening in the cost of superintendence, which is some- 
times very large. Likewise the increased efficiency often enables 
the manufacturer to lessen the number of laborers per unit of pro- 
duct. 

(g) There are also noteworthy savings along somewhat sim- 
ilar lines in connection with the cost of selling; for example, the 
number of travelling men can often be greatly reduced. In the 
case of the United States Rubber Company there was a saving of 
25 per cent in the number of travehng salesmen. Substantial econ- 
omies can be made through direct sales instead of through middle- 
men ; and the cost of advertising can be materially lessened, owing 
to more intelligent distribution and method of advertising. Adver- 
tising in a large way permits also the securing of more favorable 
rates. The popularity of a trade-mark can be more readily secured 
when the sales are direct. 



THE TRUST PROBLEM 325 

(h) There is oft^n through combination a better knowledge 
and control of credit conditions, so that bad debts may be guarded 
against. During the year 1890 the United States Rubber Company, 
doing business of about $28,000,000, lost less than $1,000 in bad 
debts. The loss by the separate companies on that volume of busi- 
ness would have averaged doubtless over $100,000 per year. 

(i) Of course there is a very material saving in many instances 
through shipping goods to customers from the nearest plants. In 
this matter of freight saving also the large combinations can often 
supply themselves with storage facilities at central points and then 
ship their goods in large quantities during the seasons of the year 
when freight rates are lowest, thus often securing the advantages 
of water transportation which otherwise would not be available. 

179. Monopoly and Efficiency, 

BY LOUIS D. BRANDEIS. 

It will be found that wherever competition has been suppressed 
it has been due either to resort tO' ruthless processes, or by im- 
proper use of inordinate wealth and power. The attempt to dis- 
member existing illegal trusts is not, therefore, an attempt to- inter- 
fere in any way with the natural law of business. It is not an at- 
tempt tO' create competition artificially, but it is removing of the 
obstacle to competition. The policy of regulated competition is dis- 
tinctly a constructive policy. It is the policy of development as 
distinguished from the destructive policy of private monopoly. It 
has always in the past and must always in the future paralyze in- 
dividual effort and initiative and deaden enterprise. Business 
progress demands that the industrial advance be unobstructed and 
private monopoly go. The highways of industrial and commercial 
development must be left open. 

Earnest argument is constantly made in support of monopoly 
by pointing to the wastefulness of competition. Undoubtedly com- 
petition involves some waste. What human activity does not? The 
wastes of democracy are among the greatest obvious wastes, but 
we have compensations in democracy which far outweigh that 
waste and make it more efficient than absolutism. So it is with 
competition. The margin between that which men naturally do 
and which they can do is so great that a system which urges men on 
to action, enterprise and initiative is preferable in spite of the wastes 
that necessarily attend that process. I say "necessarily" because 
there have been and, are today wastes incidental tO' competition that 
are unnecessary. Those are the wastes which attend that compe- 



326 READINGS IN ECONOMIC PROBLEMS 

tition which does not develop, but kill. Those*wastes the law can and 
should eliminate. It may do so by regulating competition. 

It is, of course, true that the unit in business may be too small 
to be efficient. The larger unit has been a common incident of 
monopoly. But a unit too small for efficiency is by no means a 
necessary incident of competition. It is also true that the unit in 
business may be too large to be efficient, and this is nO' uncommon 
incident of monopoly. In every business concern there must be 
a size-limit of greatest efficiency. What that limit is will differ in 
different businesses and under varying conditions in the same busi- 
ness. But whatever the business or organization there is a point 
where it vrould become too large for efficient and economic man- 
agement, just as there is a point where it would be too small to 
be an efficient instrument. The limit of efficient size is exceeded 
when the disadvantages attendant upon size outweigh the advan- 
tages, when the centrifugal force exceeds the centripetal. Man's 
work often outruns the capacity of the individual man; and, no 
matter what the organization, the capacity of an individual man 
usuallv detennines the success or failure of a particular enterprise, 
not only financially to the owners, but in service to the community. 
Organization can do much to make concerns more efficient. Organ- 
ization can do much to make larger units possible and profitable. 
But the efficiency even of organization has its bounds; and organ- 
ization can never supply the combined judgment, initiative, enter- 
prise and authority which must come from the chief executive of- 
ficers. Nature sets a limit to their possible accomplishment. As 
the Germans say : "Care is taken that the trees do not scrape the 
skies." 

That mere size does not bring success is illustrated by the 
records of our industrial history during the past ten years. This 
record, if examined, will show that: 

(i) Most of the trusts which did not secure monopolistic 
positions have failed tO' show marked success as compared with 
the independent concerns. 

This is true of many existing trusts, for instance, of the News- 
paper Trust, the Writing Paper Trust, the Upper Leather Trust, 
the Sole Leather Trust, the Woolen Trust, the Paper Bag. Trust, 
the International Mercantile Marine ; and those which have failed, 
like the Cordage Trust, the Mucilage Trust, the Flour Trust, should 
not be forgotten. 

(2) Most of those trusts which have shown marked success 
secured monopolistic positions either by controlling the whole busi- 



THE TRUST PROBLEM 327 

ness themselves, or by doing so in combination with others. And 
their success has been due mainly to their ability to fix prices. 

This is true, for instance, of the Staadard Oil Trust, the Shoe 
JNIachinery Trust, the Tobacco Trust, the Steel Tn.ist, the Pull- 
man Car Company. 

(3) Most of the trusts which did not secure for themselves 
monopoly in the particular branch of trade, but controlled the situ- 
ation only through price agreements with competitors have been 
unable to hold their own share of the market as against the inde- 
pendents. 

This is true, for instance, of the Sugar Trust, the Steel Trust, 
the Rubber Trust. 

(4) Most of the efficiently managed trusts have found it neces- 
sar}' to limit the size of their own units for production and for 
distribution. 

This is true, for instance, of the Tobacco Trust, the Standard 
Oil Trust, the Steel Trust. 

Lack of efficiency is ordinarily manifested either 
(t) in rising cost of product, 

(2) in defective quality of goods produced, or 

(3) in failure to make positive advances in processes and 
methods. 

The third of these manifestations is the most serious of all. In 
this respect monopoly works like poison which infects the system 
for a long time before it is discovered, and yet a poison so potent 
that the best of management can devise no antidote. 

Take the case of the Steel Trust. It inherited through the Car- 
negie Company the best organization and the most efficient steel 
makers in the world. It has had since its organization exceptionally 
able management. It has almost inexhaustible resources. It pro- 
duces on so large a scale that practicallv no experimental expense 
would be unprofitable if it brought the slightest advance in the 
art. And yet: "We are today something like five years behind 
Germany in iron and steel metallurg}^, and such innovations as are 
being introduced by our iron and steel manufacturers are most of 
them merely following the lead set b}^ foreigners years ago." 

The Shoe Machinery Trust, the result of combining directly 
and indirectly more than a hundred different concerns, acquired 
substantially a monopoly of all the essential machiner}' used in 
bottoming boots and shoes. Its energetic managers were conscious 
of the constant need of improving and developing inventions and 
spent large sums in efforts to do so. Nevertheless, in the year 1910 
they were confronted with a competitor so formidable that the Com- 



328 . READINGS IN ECONOMIC PROBLEMS 

pany felt itself obliged tO' buy him off, though in violation of the 
law and at a cost of about $5,000,000. I'hat competitor, Thomas G. 
Plant, a shoe manufacturer who had resented the domination of 
the trust, developed an extensive system of shoe machinery, which 
is believed to be superior to the Trust's own system, which repre- 
sents the continuous development of that Company and its prede- 
cessors for nearly half a centur}^ 

But the efficiency of monopolies, even if established, would not 
justify their existence unless the community should reap benefit 
from the efficiency ; the experience teaches us that whenever trusts 
have developed efficiency, their fruits have been absorbed almost 
wholly by the Trusts themselves. From such efficiency as they have 
developed the community has gained substantially nothing. For in- 
stance : 

The Standard Oil Trust, an efficiently managed monopoly, in- 
creased the prices of its principal products between 1895 and 1898, 
and 1903 to 1906 by 46 per cent. 

The Tobacco Trust is an efficiently managed monopoly. Be- 
tween 1899 and 1907 the selling price on smoking tobacco rose from 
2 1. 1 cents per pound to 30.1 cents; the profit per pound from- 2.8 
cents per pound to 9.8 cents. The selling price of plug tobacco rose 
from 24.9 cents per pound tO' 30.4 cents ; the profit per pound from 
1.9 cents to 8.7 cents. 

The Steel Trust is a corporation of reputed efficiency. The high 
prices maintained by it in the industr}^ are matters of common 
knowledge. In less than ten years it accumulated for its share- 
holders or paid out as dividends on stock representing merely water, 
over $650,000,000. 



D. TYPES OF MONOPOLY. 
180. A Classification of Monopolies. 

BY RICHARD T. ELY. 

First Classification : 

A. Public Monopolies. 

B. Private Monopolies. 

Second Classification : 
A. Social Monopolies. 

I. General Welfare Monopolies. 

1. Patents. 

2. Copyrights. 



THE TRUST PROBLEM 329 

3. Public Consumption Monopolies. 

4. Trade-marks. 

5. Fiscal Monopolies. 

IT. Special Privilege Monopolies. 

1. Those based on Public Favoritism. 

2. Those based on Private Favoritism. 

B. Natural Monopolies. 

I. Those arising from a Limited Supply of Raw Mate- 
rial. 

II. Those arising from Properties Inherent in the Busi- 
ness. 
III. Those arising from Secrecy. 

Third Classification : 

A. Absolute Monopolies. 

B. Complete Monopolies. 

C. Partial or Incomplete Monopolies. 

Fourth Classification : 

A. Monopolies which admit of No Increase in the Supply of 

the Monopolized Articles. 

B. Monopolies which admit of an Increased Supply of the 

Monopolized Articles. 
I. With Increasing Difficulty. 
II. With Constant Difficulty. 
III. With Decreasing Difficulty. 

Fifth Classification: 

A. Local Moiuopolies. 

B. National Monopolies. 

C. International or Universal Monopolies. 

Sixth Classification : 

A. Sellers' Monopolies. 

B. Buyers' Monopolies. 

Seventh Classification: 

A. Monopolies of Material Goods. 

B. Monopolies of Services. 

I. Services Incorporated in Material Goods. 
II. Personal Services. 



330 READINGS IN ECONOMIC PROBLEMS 

i8i. Forms o£ Monopoly Organization. 

BY CHARLES R. VAN HISE. 

Combinations during their history have passed from those of 
the loosest kind tO' those in which there is complete unity of man- 
agement. The ditferent kinds of associations and combinations 
may be roughly classified as follows : 

(i) Informal or Formal Associations for the General Protec- 
tion or Advancement of a Business. — These are illustrated by the 
various business associations. Almost every industry has such an 
association, and some of them many. Thus, there are associations 
of brewers, butchers, bankers, hardware men, lumbermen, cattle- 
men, butter makers, and of practically every producing industry. 
Similarly there are associations of salesmen, wholesalers, and re- 
tailers in each of the various industries, whether they be hardware, 
drugs, dry goods, or groceries. These sales associations may be 
national, state, or local, or they may be national with state and local 
branches. Not only are there associations of tradesmen and sales- 
men, but there are associations of people enaged in the same ser- 
vice, teachers, dentists, laborers, etc. The laborers' association may 
be for the entire country or for a definite industry, as, for instance, 
the American Federation of Labor, and the Brotherhood of Loco- 
motive Engineers. 

The purpose of all of these associations is to advance the in- 
terests of the .group concerned. This is done in the loosest form 
of association in the public convention at which views are com- 
pared, experiences exchanged, papers presented, the purposes of 
which. are to benefit one another merely by the exchange of infor- 
mation, without any implication whatever that any one will feel 
impelled to abide by any view presented. 

Thus the members of the retailers' associations meet and ex- 
change information to the common advantage. One of the items 
concerning which information is exchanged is as to the manufac- 
turers that sell to the so-called mail order house, the severest com- 
petitors of the retailers. 

Another aim in this exchange of information is to secure com- 
mon prices for standard articles. There need not be, indeed usually 
is not, a formal agreement in a community or association upon this 
matter. One way to secure a common price is by means of a 
printed list or catalog. Even without any formal agreement among 
the dealers, they all understand that the price list is to be followed. 

The regular and uniform rise and fall of the price of anthracite 
during any year illustrate the situation. In early summer the price 



THE TRUST PROBLEM 331- 

is the lowest; it is increased by regular increments as the autumn 
comes on. The price is the same in a given community from each 
dealer for purchases at a given time under similar circumstances. 
The result is almost as certain and as uniform as if it came about 
by formal agreement put into legal form. 

The stage of the association for exchange of information easily 
passes into the second phase in which regulations are adopted by 
the association tO' control the actions O'f its constituents ; as,, for in- 
stance, methods to- be pursued in advertising, quotations, and even 
scale of prices. Actions of this kind are well illustrated by the 
brewers' association, which decides as to the price to be charged 
for beer in the retail trade, issues regulations about rebates to 
retailers, and even goes into such minor details as the treating of 
drivers, and the extent to which favors are to be given by adver- 
tising, etc. 

It is charged that at the so-called Gary dinners an informal un- 
derstanding was reached concerning prices for iron and steel. What 
happened, according to Mr. Gary, was that the steel makers met 
together and exchanged information with reference to one another's 
affairs, their outputs, prices, etc., in order that each might have 
full knowledge of the transactions of other producers to guide his 
own jtidgment. 

(2) Formal Agreements. — ^In certain lines of business, corpor- 
ations have made definite agreements aboiit the management of the 
business oi the uniting parties. The arrangements, usually called 
pools, (i) divided the production in a definite manner between the 
different companies; (2) divided the markets; (3) regulated the sale 
for the home market, perhaps leaving freedom in the matter of ex- 
port; or (4) placed the entire profits in a common fund or pool to 
be divided according to an agreed plan. With the foregoing features, 
there sometimes went agreements as to prices; but this was not es- 
sential, since when controlling outputs, dividing markets, regulating 
sales, and apportioning profits, it is to the interest of all to keep 
prices at a high level. 

As the railways developed in this country, relief from excessive 
competition was found by pools under which the business between 
two points was definitely divided, and an agreement was made as 
to rates. The pool was also extensively applied to the industries. 
Under the mamifacturers' pools, which began as early as i860, each 
manufacturer was usually allotted a certain percentage of the bus- 
iness. A manufacturer who received more than the allotted per- 
centage paid into the pool a sufficient amount to balance the excess ; 
while the manufacturer who received less than his percentage re- 



332 



READINGS IN ECONOMIC PROBLEMS 



ceived from the pool a sum sufficient toi make up the deficiency. 
The business was done through a supervisor who' acted in the 
capacity of a clearing house. Pools are very well illustrated by the 
numerous agreements which were made by the iron companies 
among themselves before the organization of the United States 
Steel Corporation. 

(3) Trusts. — Since the pool was a failure, in order to attain 
the objects striven for by it, the trust was devised. Under the trust, 
each unit of the combination transferred its stock to trustees. Thus 
the entire stock of the constituent coimpanies was held by a group 
of trustees who' had complete authority over the business of all the 
companies entering the trust. An establishment or company re- 
tained its own officers and conducted its business, but under the 
direction of the trustees, as tO' line of product, amount of output, 
and price. The trust was able to prevent overbuilding and over- 
production, to prevent competition in price between its units, to 
apportion business, to consolidate buying and selling, and thus gave 
all the advantages of unity oi organization, due tO' concentration 
of industry. Well-known types of this organization were the Stand- 
ard Oil trust, the sugar trust, the cotton-seed oil trust, the whisky 
trust. The great period of the trust was from 1888 to 1897. 

(4) Holding Corporations.—Under the trust each of the con- 
stituent companies was an independent legal entity. The stock was 
simply placed in the hands of the trustee for management. In the 
holding corporation, the stock is transferred to the holding concern 
so that this corporation actually owns the stock of the constituent 
companies. So far as management and operation are concerned, 
the situation is precisely the same as under the trust and the ad- 
vantages the same, only the constituent companies are subsidiary 
companies instead of nominally independent. The subsidiary comi- 
pany maintains its officers, carries on its business, and competes so 
far as efficiency is concerned with the other companies of the corru- 
bination ; but as to nature and quantity of output and price, the 
policy is completely controlled by the corporation of which it is a 
constituent member. The era of the holding corporation began in 
the nineties, and has extended through that decade and the first 
decade of the twentieth century. Great examples are the Standard 
Oil Company and the United States Steel Corporation. 

While some of the holding corporations have remained merely 
managing companies, others of them, and somie of the more im- 
portant, have also become manufacturing companies. 

(5) Complete Merger. — This is the final stage in concentration 
of management. The stock of the constituent companies of the 



THB TRUST PROBLEM 333 

combination is actually bought in and canceled, the only stock being 
that of the master company. If, for instance, the different com- 
panies of the United States Steel Corporation — the Federal Steel, 
the Carnegie Steel, and others — cease to exist by their stock being 
canceled and stock of the Steel Corporation be the only existing 
issue, we should have the final stage of corporation management 
for this gigantic company. 

Since the recent decisions of the United States Supreme Court, 
which seem to indicate that holding companies will be in a stronger 
position if they are actually manufacturing companies, it is easy to 
predict that the great consolidations, now forming, so far as prac- 
ticable will become unified corporations. 

Just as the pool, the trust, and the holding corporation have been 
successively attacked in the courts, there can be little doubt that the 
great merger will also there be attacked. Indeed, for intrastate com- 
merce, such attack has already been begun. For instance, the Dia- 
mond Match Company, Avhich bought outright the properties of 
competing concerns engaged in the manufacture of matches, was 
declared to be an illegal monopoly in the state of Michigan. Sim- 
ilar attack is likely to follow for interstate commerce under the 
Sherman act. 

It is to be noted that the development from pool to trust, from 
trust to holding company, from holding company to^ complete con- 
solidation, has been accelerated by the laws which exist in restraint 
of trade. The dissolution of pools by the courts led to the trust ; 
the dissolution of the trust led to the holding corporation; the dis- 
solution of the holding corporation at the present time is now lead- 
ing to the consolidated company. 



E. THE INFLUENCE OF MONOPOLY ON PRICE. 
182. Monopoly Price a Competitive Price. 

BY FRANKUN HENRY GIDDINGS. 

Imagine a commercial world in which the output of every im- 
portant product is controlled by a single organization. Imagine 
that the entire wheat crop is commercially controlled by one trust, 
the cotton crop by another, the iron and steel output by another, the 
paper output by yet another, and so on through the entire list of 
marketable goods. In such a commercial world, soi organized, 
would each of these great trusts be able to fix prices in accordance 
with its own desire toi amass wealth and pay dividends, irrespective 



334 



READINGS IN ECONOMIC PROBLEMS 



of the wishes and efforts of consumers? The prevaihng opinion 
among consumers is, I think, that just such a thing would happen. 

The truth, on the contrary, is that by no conceivable possibility 
could any such thing happen ; and tO' make the point perfectly clear 
I will ask you to follow me in a demonstration which, in its reason- 
ing, is essentially mathematical, but is not especially difficult. Ob'- 
viously, if every product were controlled by a single trust, the situa- 
tion would be precisely the same, as far as prices were concerned, 
that it would be if each product were controlled by a single indi- 
vidual. Let us, then, designate each product by a single small letter, 
a, b, c, d, e, etc., and designate the persons in control of each pro- 
duct by a single capital letter, A, B, C, D, E, etc. The commercial 
world, then, is made up of the individuals A, B, C, D, E, each of 
whom is the producer of some great marketable commodity, and 
each of whom is the consumer oi the commodities controlled by 
his fellow-producers. Now it may seem that A, who, we will sup- 
pose, is the producer and controller of wheat, can compel B, C, D, 
and E to pay extortionate prices for every bushel they demand, 
because, since no one else in the world can supply wheat, they 
must buy of A or starve. In like manner, it may appear that B, C, 
and D, the producers of cotton, steel, and paper, can charge extor- 
tionate prices because they command the only known supply. This 
is the assumption that the general public makes. It is, however, an 
assumption which has all the characteristics of an inadequate, and 
therefore a false, economic theory. It would be true only on one 
condition, namely, that the consumption of goods was strictly lim- 
ited to those small quantities that are absolutely necessary to support 
existence. That condition, however, practically never exists in the 
real world ; for human wants are indefinitely expansive, and every 
known commodity can be applied tO' a great number of different 
uses besides the primary one of supporting life. Wheat, for ex- 
ample, is used not only as a food product, but in enormous quanti- 
ties is converted intO' starch, dyestuffs, and other chemical products. 
Cotton is used not only for necessary clothing, but in vastly greater 
quantities for purposes of comfort, convenience, and ornamentation. 
Paper is used not merely for absolutely necessary records, accounts, 
and communications, but in enormously greater quantities for pleas- 
ure, and even for trifling satisfactions. 

While, therefore, an individual who absolutely controlled the 
supply of any given commodity might conceivably compel his fel- 
lows-men to pay extortionate prices for that very small percentage 
of his product which was absolutely indispensable to their existence, 
by no possibility could he compel them toi pay such prices for that 



THE TRUST PROBLEM 



335 



vastly greater percentage which they desired merely for purposes 
of convenience, comfort and pleasure. 

And this is not all. Our comforts and pleasures are extremely 
variable things. Very few of us feel in any degree bound tO' choose 
one form of merely convenient or pleasurable satisfaction rather 
than another. We have preferences, of course, but we subject our 
preferences, after all, to a rather rigid economic control. 

What, then, would be the actual situation in which our imaginary 
producers, A, B, C, D, and E, each having absolute control of a 
particular product, would find themselves placed ? They could, if 
they chose, limit production tO' those very small quantities of com,- 
modity which men must have or die ; but if they did this, A, B, C, 
D, and E would themselves live and die poor men. No great for- 
tune would ever be amassed by that policy. The alternative con- 
fronting them, then, would be tOi encourage the development oi a 
multiplicity of uses for their respective products, and a liberal con- 
sumption to be met by a large production ; and this they could do 
only by offering their goods at reasonable prices. 

This alternative adopted, oiir imaginary producer would in- 
stantly make a most interesting discovery — the discovery, namely, 
that he was living and producing in a world ruled by competition, 
and not, as he had supposed, by monopoly. Until now he had 
imagined that the only kind of competition which he had to fear 
was a competition between himself and some other producer of the 
same sort of commodity which he was producing and offering. 
That is to say, A had thought of competition as coming only from 
some other A, A', A"', etc. But now he discovers that the real com- 
petition of the real business world is not the competition between 
A and A', or between B and B' ; it is the competition between A 
and B, between A and C, between B and C, between C and D, and 
so on. In other words, it is not the competition between one seller 
of wheat and another seller of wheat that really rules the business 
world ; it is rather the competition between the producer of wheat 
and the producer of cotton. This competition is real, it is inevita- 
ble, it is controlling, because of the ineradicable fact that each of the 
producers is appealing to a consuming public whose purchasing 
power is limited. The consuming public is not at present, and so 
far as human foresight can now perceive it never will be, in the 
enjoyment of an unlimited income. Every industry, then, is appeal- 
ing to a consuming public to which every other industry is appeal- 
ing, and which cannot buy unlimited quantities of commodity from 
each industry. This simply means that when one group of pro- 
ducers demands unusually high prices, all other groups of producers 



336 RBADINGS IN ECONOMIC PROBLEMS 

can very considerably increase their sales, in virtue of that law of 
human nature according to which men can and do, tO' a great ex- 
tent, substitute one group of conveniences and pleasures for an- 
other, postpone certain enjoyments for a time, and distribute their 
expenditures at all times in such a way as to obtain the greatest 
satisfaction for a given outlay. 

183. Monopoly Control of Price. 

BY THE; INDUSTRIAL COMMISSION. 

The rise or fall of prices after a comibination has been formed 
is often due to causes other than combination itself. In every devel- 
oping industry the general tendency is for prices tO' fall. Improve- 
ments in methods of production and distribution are being made 
continually. This is the nomial condition of American industry, 
and coimbination is one of its many means. 

Since the era of combination has been entered upon there is no 
standard by which to judge accurately whether or not prices are 
too high, for comparison can be made with former conditions only ; 
but the method most approved by business men and economists is 
to compare the changes in price of the product of a given com- 
bination with the average price (the index number) of many arti- 
cles of the same general class, regarding which most conditions 
are the same, except the one of combination. Such a comparison 
can not be entirely conclusive, as the factors entering into the prob- 
lem are numerous, but it may at least be suggestive of the effect 
of combination. 

With this caution as to the untrustworthiness of many price 
statistics and the inferences drawn therefrom, some conclusions 
may still be stated which seem reasonable. 

If combinations are able to effect large savings, it becomes evi- 
dent that they can lower the margin between the cost of the raw 
material and of the finished product, thus giving to the owners 
larger profits than before and to consumers lower prices. 

If the combination has a practical monopoly, either through the 
control of materials or by means of a patent, or through the power 
of large capital and the control of a very large proportion of the 
output, it naturally becomes passible for it so tO' increase the mar- 
gin between cost of materials and finished products as to make 
larger profits not merely through the lessening oi the cost of pro- 
duction, but through sheer power over the market. In these two 
"ways, then, through savings and through the power of monopoly, 



THE TRUST PROBLEM 



337 



the marginal profit as well as the price of products may be increased 
by the combination. 

The facts regarding prices, so far as they have been carefully 
studied and interpreted, seem to bear out this conclusion. In the 
reports of the Industrial Commission there has been an attempt to 
present a statistical study of this question. In several different lines 
of industry — such as sugar refining, oil refining, iron and steel man- 
ufacture, and others — a careful comparison of the margin between 
the cost of the raw materials and the price of finished products has 
been made. In some cases it is possible to eliminate practically 
every other factor excepting that of combination itself. In others, 
while the evidence is not so clear, it seems to tend in the same 
direction. The general results of the study show that in most cases 
the combination has exerted an appreciable power over prices, and 
in practically all cases it has increased the margin between raw ma- 
terials and finished products. Since there is reason to believe that 
the cost of production over a period of years has lessened, the con- 
clusion is inevitable that the combinations have been able tO' increase 
their profits. 

In some cases the increased cost of the raw materials accounts 
for the greater part of the increase in the price of the finished pro- 
duct, but the study of the margin makes it clear that there has been 
also an increase in profit. In other cases there has been an in- 
crease in the cost of production itself, owing to advances in the 
price of machinery, wages, etc. ; but in all of the industries most 
thoroughly investigated, a careful analysis shows that the margin 
has not been allowed to become so narrow as under a system of free 
competition. The dividends of the combinations and the testimony 
of their managers confirm the conclusion reached. On the other 
hand, on account of the saving effected by manufacturing- on a large 
scale, it should be possible for the combination to put its product 
upon the market cheaper than can its competitor. There is reason 
to believe in some lines of industry this has been done, and that 
competitors are crushed out simply because of the advantageous 
offers made to consumers by the combinations. 

Many times the lowering of price by a combination has not been 
general, but has been made in comparatively small areas of terri- 
tory, or sometimes even to single consumers ; while in order to 
recoup itself for this local lessening of profit, if not even for an abso- 
lute loss, the combination has maintained or even raised prices else- 
where. Complaints of this nature have been made especially against 
the Standard Oil Company, but also against other combinations. 
"The fact is at times denied, and the practice is comparatively seldom 



338 READINGS IN UCONOMIC PROBLEMS 

defended by officers of conibinations on business reasons, but cer- 
tain managers do not hesitate to say that it is their policy to meet 
competitive prices, and that if they are compelled to lose in certain 
localities, they must raise their prices elsewhere in order to secure 
what they beileve to be reasonable profit. 

A similar control over prices, through the power of the combina- 
tion, is found at times in connection with the purchase of raw ma- 
terials, although ordinarily the effect is less marked here than in 
the case of selling prices. There can be no doubt that the Standard 
Oil Company has for many years, through its control of pipe lines. 
been able practically tO' fix the price of crude petroleum. The Amer- 
ican Sugar Refining Company, its president admits, owing to its 
power in the market, is able to buy at slightly better rates than its 
competitors, but the difference is so slight as not to affect to any 
great extent general market conditions. 

184. Cut-Throat Prices: The Competition that Kills. 

BY LOUIS D. BRANDEIS. 

If a dealer is selling unknown goods or goods under his own 
name, he alone should set the price; but when a dealer has to use 
somebody else's name or brand in order tO' sell goods, then the 
owner of that name or brand has an interest which should be re- 
spected. The transaction is essentially one between the two prin- 
cipals — the maker and the user. All others are middlemen or 
agents ; for the product is not really sold until it has been bought 
by the consumer. Why should one middleman have the power to 
depreciate in the public mind the value of the maker's brand and 
render it unprofitable not only for the maker but for other middle- 
men? 

When a trade-marked article is advertised to be sold at less than 
the standard price, it is generally done to attract persons to the par- 
ticular store by the offer of an obviously extraordinary bargain. 
It is a bait — called by the dealers a "leader." But the cut-price 
article would more appropriately be termed a "mis-leader" ; because 
ordinarily the very purpose of the cut-price is to create a false im- 
pression. 

The dealer who sells the Dollar Ingersoll watch for sixty-seven 
cents, necessarily loses money in that particular transaction. lie 
has no desire to sell any article on which he must lose money. He 
advertises the sale partly to attract customers to his store ; but main- 
ly to create in the minds of those customers the false impression 
that other articles in which he deals and which are not of a standard 



THE TRUST PROBLEM 



339 



or known value will be sold upon like favorable terms. The cus- 
tomer is expected to believe that if an Ingersoll watch is sold at 
thirty-three and one-third per cent less than others charge for it, 
a ready-to-wear suit or a gold ring will be sold as cheap. 

The evil results of price-cutting are far-reaching. It is some- 
times urged that price-cutting of a trade-marked article injures no 
one; that the producer is not injured, since he received his full 
price in the original sale to jobber or retailer; and indeed may be 
benefited by increased sales, since lower prices ordinarily stimulate 
trade ; that the retailer cannot be harmed, since he has cut the price 
voluntarily to advance his own interests ; that the consumer is 
surely benefited because he gets the article cheaper. But this rea- 
soning is most superficial and misleading. 

To sell a Dollar Ingersoll watch for sixty-seven cents injures 
both the manufacturer and the regular dealer; because it tends to 
make the public believe that either the manufacturer's or the deal- 
er's profits are ordinarily exorbitant ; or, in other words, that the 
watch is not worth a dollar. Such a cut necessarily impairs the 
reputation of the article and, by impairing reputation, lessens the 
demand. It may even destroy the manufacturer's market. A few 
conspicuous "cut-price sales" in any market will demoralize the 
trade of the regular dealers in that article. They cannot sell it at 
cut prices without losing money. The cut by others, if known, 
would create the impression on their own customers of having 
been overcharged. It is better policy for the regular dealer to 
drop the line altogether. On the other hand, the demand for the 
article from the irregular dealer who cuts the price is short-lived. 
The cut-price article cannot long remain his "leader." His use for 
it is sporadic and temporary. One "leader" is soon discarded for 
another. Then the cut-price outlet is closed to the producer ; and, 
meanwhile, the regular trade has been lost. Thus a single prominent 
price-cutter can ruin a market for both the producer and the reg- 
ular retailer. And the loss to the retailer is serious. 

On the other hand, the consumer's gain from price-cutting is 
only sporadic and temporary. The few who buy a standard article 
for less than its value do benefit — unless they have, at the same 
time, been misled into buying some other article at more than its 
value. But the public generally is the loser; and the losses are 
often permanent. If the price-cutting is not stayed, and the man- 
ufacturer reduces the price to his regular customers in order to 
enable them to retain their market, he is tempted to deteriorate the 
article in order to preserve his own profits. If the manufacturer 
cannot or will not reduce his price tO' the dealer, and the regular 



340 



READINGS IN ECONOMIC PROBLEMS 



retailers abandon the line, the consumer suffers at least the incon- 
venience of not being able tO' buy the article. 

The independent producer of an article which bears his name or 
trade-mark — be he manufacturer or grower — seeks nO' special priv- 
ilege when he makes contracts to prevent retailers from cutting his 
established selling price. 

The position of the independent producer who establishes the 
price at which his own trade-marked article shall be sold to the 
consumer must not be confused with that of a combination or trust 
which, controlling the market, fixes the price of a staple article. 
The independent producer is engaged in a business open to compe- 
tition. He establishes his price at his peril — the peril that if he 
sets it too high, either the consumer will not buy or, if the article 
is, nevertheless, popular, the high profits will invite even more com- 
petition. The consumer who' pays the price established by an inde- 
pendent producer in a competitive line of business does so volun- 
tarily ; he pays the price asked, because he deems the article worth 
that price as compared with the cost of other competing articles. 
But when a trust fixes, through its monopoly power, the price of a 
staple article in coiTimon use, the consuirter does not pay the price 
voluntarily. He pays under compulsion. There being no competi- 
tor he must pay the price fixed by the trust, or be deprived of the 
use of the article. 

Price-cutting has, naturally, played a prominent part in the his- 
tory of nearly every American industrial monopoly. 

The competition attained by prohibitinig the producer of a trade- 
marked article from maintaining his established price offers noth- 
ing substantial. Such competition is superficial merely. It is spor- 
adic, temporary, delusive. It fails to protect the public where pro- 
tection is needed. It is powerless to prevent the trust from fixing 
extortionate prices for its product. The great corporation with 
ample capital, a perfected organization and a large volume of bus- 
iness, can establish its own agencies or sell direct to the consumer, 
and is in no danger of having its business destroyed by price-cut- 
ting among retailers. But the prohibition of price-maintenance 
imposes upon the small and independent producers a serious handi- 
cap. Some avenue of escape must be sought by thein; and it may 
be found in combination. Independent manufacturers without the 
capital or the volume of business requisite for engaging alone in 
the retail trade will be apt to combine with existing chains of 
stores, or to join with other manufacturers similarly situated, in 
establishing new chains of retail stores through which to market 
their products direct to the consumer. The process of exterminat- 



THE TRUST PROBLEM 



341 



ing the small independent retailer already hard pressed by capital- 
istic combinations — the mail-order houses, existing chains of stores, 
and the large department stores^ — would be greatly accelerated by 
such a movement. Already the displacement of the small indepen- 
dent business man by the huige corporation with its myriad of em- 
ployees, its absentee ownership, and its financial control, presents 
a grave danger to our democracy. The social loss is great ; and 
there is no ecoinoniic gain. But the process of capitalizing free 
Americans is not an inevitable one. It is not even in accord with 
the natural law of business. It is largely the result of unwise, man- 
made, privilege-creating law, which has stimulated existing tenden- 
cies to inequality instead of discouraging them. Shall we, under the 
guise of protecting competition, further foster monopoly by creat- 
ing immunity for the price-cutters ? 



F. TYPICAL MONOPOLISTIC PRACTICES. 
185. Competitive Methods of Standard Oil. 

BY JAMEiS RUDOLPH GARFIEI.D. 

Upon the request of its attorney, all the essential facts discov- 
ered by this Bureau were presented tO' the company at the close 
of the investigation, and an exhaustive statement relating thereto 
was made by its chief traffic officer. There was no denial of the 
facts found, but explanations of particular situatioais were offered, 
and it was urged that the facts did not show any violation by the 
Standard of the letter or spirit of the interstate-commerce law. 
A most careful review of the facts and the explanations -leads to 
the following conclusions : 

The Standard Oil Company has habitually received from the 
railroads, and is now receiving, secret rates and other unjust and 
illegal discriminations. 

During 1904 the Standard saved about three-quarters of a mil- 
lion dollars through the secret rates and there may be other secret 
rates which the Bureau has not discovered. This amount repre- 
sents the difference between the open rates and the rates actually 
paid. Many of these discriminations were clearly in violation of 
the interstate-commerce law, and others, whether technically illegal 
or not, had the same effect upon competitors. 

These discriminations have been so long continued, so secret, 
so ingeniously applied to new conditions of trade, and so large in 
amount as to make it certain that thev were due to concerted action 



342 



READINGS IN ECONOMIC PROBLEMS 



by the Standard and the railroads. The advantage to the Standard 
over its competitors from such open discriminations is enormous, 
probably as important as that obtained through the secret rates. 

If an unfair discrimination be obtained by one shipper through 
a device which in itself is seemingly not prohibited by law, that fact 
shows that the law is defective and should be strengthened; it does 
not show that the discrimination is proper or just. 

The following are a few oi the most important discriminations 
and the methods by which they were obtained: 

(i) For about ten years the New England territory has been 
in control of the Standard Oil Company by reason of the refusal 
of the New York, New Haven and Hartford road and of the Bos- 
ton and Maine road, on all but a few divisions, to* prorate, i. e., to 
join in through rates — on oil shipped from west of the Hudson 
River, and by means of the adjustment of published rates. The 
refusal to prorate increased the rail rates from the West from 8 
to 10 cents per hundred pounds. These railroads do' prorate on all 
other commodities ; their refusal tO' do so in the case of oil amount- 
ed to imposing a substantial tax on all consumers in the region they 
cover, and is also a heavy discrimination against the smaller refiners. 

(2) The Standard Oil Company has been able to absolutely 
control for many years the sale of oil in the northeastern part of 
New York and in a portion of Vermont by means of secret rates 
from its refineries at Olean and Rochester. 

The Pennsylvania Railroad has given the Standard a rate of 9 
cents a barrel from Olean, N. Y., to Rochester, while the indepen- 
dent refineries situated in territory adjacent to Olean were given 
a rate of 38 cents a barrel. By means of this 9-cent rate, in com- 
bination- with a rate from Rochester to Norwood, N. Y., a virtually 
secret and veiy low rate from- Norwood, N. Y., to Burlington, and 
secret local rates therefrom, the Standard has been able to supply 
central and northern Vermont with oil at a rate of from 15 to 21 
cents per hundred pounds whereas no independent refiner could 
reach that territory from western Pennsylvania save by a rate vary- 
ing from 33 to 50 cents per hundred pounds. 

(3) The Standard Oil Company has maintained absolute con- 
trol of almost the whole section of the country south of the Ohio 
River and east of the Mississippi by means of secret rates and open 
discriminations in rates from Whiting, Ind. 

For example, the published tariff rate from Whiting, Ind., the 
great western refinery of the Standard, to Birmingham, Ala., was 
44 cents per hundred pounds. For at least ten years the Standard, 
by means of a secret combination of rates by way of Grand June- 



THE TRUST PROBLEM 343 

tion, Tenn., over the lines of the Chicago and Eastern IlHnois, the 
JlHnois Central, and the Southern Railway, has shipped oil to Bir- 
mingham for 29^4 cents. The Toledo' competitor, no farther dis- 
tant, had tO' pay 47^ cents. 

Again, the open rate from; Whiting to Evansville, Ind., has been 
for many years 11 cents. The Standard has for about ten years 
shipped oil to Evansville, for local use and for many points beyond 
in the South-east, at so-called State rates of 6 cents and 8^4 cents. 
The freight paid by the Standard in this case has been about 
$10,000 a year less than the open rate. 

(4) The Standard Oil Company has for at least ten years 
shipped oil from Whiting to .East St. Louis, III, at a rate of 6 or 
6% cents on three of the five railroads running between those 
places, while the only duly published rate on all roads has been 
18 cents during all that period. This discrimination saved the 
Standard about $240,000 in 1904. 

(5) In the Kansas-Territory field there are some unfair open 
rates. A more important discrimination has been in the arbitrary 
weights fixed by the railroads on crude oil and fuel oil. This dis- 
crimination prevents the Kansas producer from selling his crude 
oil, especially that of low gravity, advantageously in competition 
with the fuel oil produced by the Standard and the small local re- 
finers. 

Crude oil is charged on the basis of 7.4 pounds per gallon; its 
actual weight is about 7.2 pounds. Fuel oil produced by the refiner- 
ies is charged at 6.4 pounds ; it actually weighs about 7.6 pounds. 
A barrel of crude oil shipped from Kansas to St. Louis is charged 
nearly 10 cents more than a barrel of fuel oil ; this difference in 
freight charges is equal to more than one-third of the price of 
low-grade Kansas crude. 

This discrimination has existed for about four years. It does 
not exist in any other field. The legislation of Kansas in 1905 put 
an end to it so far as shipments within the State are concerned. 

Most of the secret rates, and some of the open discriminations 
discovered by the Bureau of Corporations, were abolished by the 
railroads shortly after such discovery. Nevertheless, the wide- 
spread discriminations in open rates still in force leave the inde- 
pendents at serious disadvantage. The investigation has only inci- 
dentally touched State shipments from distributing centers, partic- 
ularly in less than carloads. The few instances examined suggest 
the probability of discriminations on such shipments which, taken in 
connection with through traffic, may result in discriminations on 
interstate business. 



344 READINGS IN ECONOMIC PROBLEMS 

1 86. Monopolistic Practices of the American Tobacco Company. 

BY CHIEF justice; EDWARD D. WHITE. 

We think the conclusion of wrongful purpose and illegal com- 
bination is overwhelmingly established by the following considera- 
tions : 

(a) By the fact that the very first organization or combination 
was impelled by a previously existing fierce trade war, evidently 
inspired by one or more of the minds which broiught about and be- 
came parties to that combination. 

(b) Because, immediately after that combination and the .in- 
crease of capital which followed, the acts which ensued justify the 
inference that the intention existed to use the power O'f the combina- 
tion as a vantage ground to further monopolize the trade in tobacco 
by means of trade conflicts designed to injure others, either by 
driving competitors out of the business or compelling them to be- 
come parties to a combination — a purpose whose execution was il- 
lustrated by the plug war which ensued and its results, by the snuff 
war which followed and its results, and by the conflicts which im- 
mediately followed the entry of the combination into England and 
the division of the world's business by the two foreign contracts 
which ensued. 

(c) By the ever-present manifestation which is exhibited of a 
conscious wrongdoing by the form in which the various transactions 
were embodied from the beginning, ever changing but ever in sub- 
stance the same. Now the organization of a new^ company, now the 
control exerted by the taking of stock in one or another or in sev- 
eral, so as to obscure the result actually attained, nevertheless uni- 
form,, in their manifestations of the purpose to restrain others and 
to monopolize and retain power in the hands of the few who, it 
would seem, from: the beginning contemplated the mastery of the 
trade which practically followed. 

(d) By the gradual absorption of control over all the elements 
essential to the successful manufacture of tobacco products, and 
placing such control in the hands of seemingly independent corpora- 
tions serving as perpetual barriers to the entry of others into the 
tobacco trade. 

(e) By persistent expenditure of millions upon millions of dol- 
lars in buying out plants, not for the purpose of utilizing them, but 
in order to close them up and render them useless for the purposes 
of trade. 



THE TRUST PROBLEM 



345 



(f) By the constantly recurring stipulations, whose legality, 
isolatedly viewed, we are not considering, by which numbers of 
persons, whether manufacturers, stockholders or employees, were 
required to bind themselves, generally for long periods, not to- com- 
pete in the future. 

187. Dealers' Agreement with the American Tobacco Company. 

New York, October i, 1895. 

D^XR Sir : — We will be glad to consign to you for sale, on com- 
mission, our various brands of cigarettes, such cigarettes to be sent 
by us, and received, sold and accounted for by you, upon terms and 
conditions as follows, namely : 

First. All cigarettes which we may send to you, you are to sell 
to the retail trade only for retail piiirpoises ; you are to sell none to 
other than retail dealers except by our written permission. 

Second. You shall, at all times, sell our cigarettes at such prices 
only as we may fix in selling lists sent to you. You shall not sell, 
or dispose of, any cigarettes at lower prices than those so* fixed. 

Fourth. All cigarettes consigned to you are to remain our prop- 
erty until sold by yoin, subject only to your lien thereon for all ad- 
vances which you have made under the terms of this agreement. 

Seventh. If you do not discriminate against our cigarettes in 
favor of those of other manufacture, and if you do not sell, or dis- 
pose of, any of our cigarettes at less than the list price, and if, in all 
respects, you comply with the terms of this agreement, we will pay 
you a commission of two and one-half (25^) per cent on the amount 
realized by you from the sale of the cigarettes which we may con- 
sign to you. 

Eighth. If, however, you handle cigarettes of our manufacture 
exclusively, and do not sell or distribute, or in any way aid in the 
sale, or distribution of, cigarettes of other manufacture, and, if 
you, in all respects, fully comply with the terms and conditions of 
this agreement, we will pay you an additional commission of seven 
and one-half (7^) per cent on the amount realized by you from the 
sale of the cigarettes which we may consign to you. 

Tenth. All obligations upon our part to pay you any commis- 
sion for the sale of the cigarettes which we may consign to you is, 
and shall be, dependent upon your strict compliance with the agree- 
ment hereinbefore contained that you will not sell any of our cigar- 
ettes for a less price than that fixed in our selling lists sent to you. 
If you should sell or dispose of any o^f our cigarettes at less than 
such price, you shall forfeit all right to the payment of any commis- 



346 READIXGS IX ECOXOMIC PROBLEMS 

sions on cigarettes which you may have previously sold, and on 
Nvhich commissions have not been paid you, and you shall at once, 
on demand, pay to us the list price for all cigarettes which you have 
sold, and deliver to us all of our cigarettes then in your possession 
which may have been previously consigned by us to you. 

Eleventh. Upon your acceptance in writing of the tenus and 
conditions of this agreement, yoa understand and agree that you will 
handle our cigarettes exclusively, on the tenns and conditions herein 
specified, and in the event that you hereafter detennine to sell 
cigarettes of other manufacture, you are to notify us, in writing, of 
such determination: and thereafter, if you have fully complied with 
all other terms of this agreement, the commissions to be paid to 
you for sale of our cig"arettes shall be at the rate of two and one- 
half (2j-'2) per cent. 

Fourteenth. The rieht is reserved to us at anv time, to decline 
to sell you any more cigarettes, and to withdraw the cigarettes al- 
ready consigned to you, upon repaying to you all your legitimate 
advances thereon, and the right is reserved to you, at any time, to 
decline to act further for us. after having delivered to us all cigar- 
ettes then in your hands, and paying over to us the proceeds of all 
sales of our cigarettes at list price. 

Sixteenth. Xo employe of this company has any authority 
whatever to change or modify this agreement, or any circular, let- 
ter, or price list of this company. 

Your agreement in writing hereon to receive our cigarettes on 
consigmnent and to sell and account for the same, under the above 
conditions, when executed by you. will constitute a binding contract 
between you and our company. 

^'ery truly yours. 
The American Toracco Company. 

i88. The Shoe Machinery Trust. 

BY JAMES H. VAHEY. 

I would like to present to your readers some of the reasons for 
the opposition in ^lassachusetts to the leases of the United Shoe 
IMachiner}- Company. One of these leases would cover practically 
a whole page of a newspaper. They provide that the lessee shall 
neither lease nor use from any other concern any other machines 
which do the same kind of work as those procured from the tnist. 

A bill has been introduced in the Massachusetts senate to pro- 
vide that this shall not be done. 

About seven years ago the Shoe Machiner)- Company acquired 



THE TRUST PROBLEM 



347 



control of all the independent shoe machinery companies and con- 
solidated them mider the present system. It does not sell machinery 
and will not permit manufacturers to buy any. Its leases provide 
that patents of the trust shall be incontestable. Many of them have 
expired. The life of a patent is 17 years. Many of those held by 
the trust are 24 years old, but it makes the manufacturer agree that 
he will not contest the validity of the patents, when he takes a lease. 
It also makes him agree to buy eyelets, nails, tacks and wire from 
the trust. The profit on some of these things is 500 or 600%. It 
has driven from business the manufacturers of these articles, be- 
cause it has tal<en the market away from them, and many a New 
England town can now show a tribute to the monopoly of the United 
Shoe Machinery Trust in its deserted shops and factories. 

The royalty charges on these machines represent an enormous 
percentage of profit. 

The policy of this company also prevents any development of 
inventive genius, because it crushes inventors into submission. No- 
body has a right to use any improvements on machinery, except 
with its consent ; therefore, inventors have no inducement to improve 
shoe machinery. Manufacturers are not allowed to use improved 
shoe machines, even though they have a chance to use some that 
will do twice the amount of work, or improve the quality of the 
work. 

Again, our manufacturers are placed at a serious disadvantage 
in competing with foreign shoe manufacturers wdio can buy Amer- 
ican tanned leather 10 to 15% cheaper than we can. The shoe ma- 
chinery^ trust, instead of lessening the burden, adds to it by install- 
ing its machinery in the factories of our competitors all over the 
world, and teaching them how to run them according to the im- 
proved methods of intelligent Massachusetts manufacturers who 
have made it a life study. In this way it is giving European man- 
ufacturers the benefit of our manufacturers' ideas and methods of 
conducting business. It is throttling our own industries and forc- 
ing from our own manufacturers exorbitant royalty charges. 

The trust has attempted to stifle the independence, originality, 
and inventive genius of our shoe manufacturers ; that it does not 
succeed is due to the possession of qualities which no trust can 
control. They are now being demonstrated by a resolute and de- 
termined effort to free the shoe industry^ from the bonds which the 
trust is trying to force upon ever>^ shoe manufacturer in the United 
States. 

Last year a bill similar to the one now before the Massachusetts 
legislature was introduced. It passed the House of Representatives, 



348 READINGS IN ECONOMIC PROBLEMS 

and the trust compelled its defeat in the Senate. If the company 
was not afraid that it could not succeed in competition, why did it 
oppose this simple bill, the only object of which was to prevent it 
from enjoying the absolute monopoly of the shoe machinery busi- 
ness in that commonwealth? 

The only logical conclusion to be derived from the whole policy 
of the shoe machinery trust is that it intends to control the shoe 
industry of the world. Its ambition is boundless. At the present 
time it consists in making every man, woman and child who wears 
shoes pay royalty to it. Its conception of the future is that this 
shall last forever. The independence of Massachusetts is aroused 
and will assert itself, because forever is a long time. 

189, Practices of the American Sugar Refining Company. 

BY CHARLUS R. VAN HISiJ. 

(i) Through collusion of the officers of the sugar company 
and the officers of the government, duties were paid upon the basis 
of short weights. There were recovered from the company on ac- 
count of these weighing frauds $1,835,486. The secretary-treas- 
urer of the American Sugar Refining Company and the general 
manager of the Brooklyn Refinery were convicted for participation 
in them. 

(2) In the investigation of the weighing frauds illegalities 
were also discovered under which the company had received draw- 
backs for exported syrup in excess of the amount justly due. The 
company settled the case with the government by the payment of 
$700,000. 

(3) The company has been convicted of taking rebates from a 
number of railways ; and in consequence of these practices has been 
fined sums aggregating $98,000. 

(4) In addition toi the above, the Congressional Committee 
finds strikingly developed several evils which they regard as char- 
acteristic of combinations. These are as follows : 

"a. Original overcapitalization of great industrial corporations 
resulting in increased cost of production, if a profit is to be made 
(as is always insisted upon) on the inflated capitalization, and high- 
er prices of the product to the consuming public. 

''b. The temptations of the persons who organize and control 
these large corporations to earn dividends on watered stock as soon 
as possible, so that such stock may be unloaded in the open markets 
upon the investing public. These dividends can rarely if ever be 
made without increasing prices tO' the consumer. 



THE TRUST PROBLEM 349 

"c. Exploitation not only O'f the consuming public and of the 
investing public, as already set out, but alsO' of the corporations 
themselves, by their officers, directors, and trustees, Avho do not 
hesitate to overburden the consumer, to deceive the investor, and 
to take advantage of the corporations that have trusted them, when- 
ever it will line the pockets of such individual trustees." 



G. LABOR AND MONOPOLY. 
I go. Labor and the United States Steel Corporation. 

BY JOHN A. FITCH. 

K discussion of the subject "Industrial Combinations and the 
Wage Earner" with reference to the Steel industry, may well take 
the form of an answer to- the inquiry, "Has the formation of the 
United States Steel Corporation proven a good thing for labor or 
the reverse?" 

The reasons for choosing the United States Steel Corporation 
are both logical and obvious, I believe. It is the greatest combina- 
tion in the industry ; it has more money to- spend on improvemenis 
than any other, and so furnishes the most favorable basis for judg- 
ment as to the effect of such combinations ; and it em(ploys over 
200,000 workmen, while its largest competitor employs less than 
20,000. 

It may be well first to consider briefly who the steel workers are. 
Not over twenty per cent of the employees in blast furnaces and 
rolling mills can be regarded as highly skilled. Twenty to twenty- 
five per cent more may be termed semi-skilled, and the remaining 
fifty-five to sixty per cent are unskilled laborers. Roughly, the 
gradations in skill correspond to gradations in nationality. You will 
not find an Anglo-Saxon among the unskilled ; you will hardly find 
one in ten who is American born. Sixty per cent of them are un- 
naturalized and a third are unable to speak the English language. 

Twenty-five years ago, and even more thirty years ago-, unskilled 
labor positions in the steel industry were filled by Irish immigrants. 
To-day, the Irish employees that remain are foremen, and the com- 
mon labor is done by representatives of the races of southern and 
southeastern Europe. But even more than ordinarily this shift has 
taken place in the steel industry, owing to the fact that it is coming 
to be more and more an industry of machinery and of unskilled 
men. There has been great expansion in this industry, and the 
absolute number of skilled men is much larger than it was even 



350 READINGS IN ECONOMIC PROBLEMS 

fifteen years ago, but the proportion of skilled men to the whole 
number employed is much less than in former years and the ten- 
dency is for it to become still less as time goes on. The steel in- 
dustry has had a great demand in the past for the raw South Euro- 
pean immigrants and there is every reason to believe that that de- 
mand will be larger as time goes on. 

Turning now to the discussion of labor conditions, employees in 
sheet and tin mills work in three shifts of eight hours each. Except 
for a negligible fraction of one per cent in other mills, the sheet 
and tin workers are the only ones who have an eight-hour day. 
Yard laborers in all the mills have a ten-hour day and so do shop 
men, that is, moiders, pattern-makers, machinists, blacksmiths, etc. 
Tube-mill workers and those engaged in fabricating structural and 
bridge material have a ten-hour day. In the actual manufacturing 
processes, however, blast-furnaces, open-hearth and Bessemer de- 
partments, and in the rolling of rails, beams and plates, the regular 
working day is twelve hours. To give some idea of the numbers, 
the Federal census of 1910 shows that there were 277,913 employees 
in blast-furnaces, steel works and rolling mills in the whole country 
in 1909. Fully half of these were twelve-hour men, for about fifty 
per cent of all employees engaged in manufacturing processes have 
a twelve-hour day. 

Since the beginning' of the industry in this country, blast-fur- 
naces have regularly, and open-hearth furnaces have often, been 
operated seven days a week. Toi the long working day in these 
departments, then, there has been added a long working week. 
This has led further tO' the introduction of the so-called "long 
turn." The custom is for the two crews tO' change about each week, 
that is, the day crew of one week becomes the night crew of the 
next, and vice versa. This can be accomplished in only one of 
two ways. The Saturday night crew may work until Sunday noon 
and then be relieved by the day crew, who remain on duty until 
Monday morning at 6, when the other crewi comes back on duty 
again. That makes an eighteen-hour period for each crew. The 
more general custom, however, is for the crew that goes to- work 
Sunday morning to remain on duty a full twenty-four hours. 

These were the hours of labor that were general in the industry 
when the United States Steel Corporation was fo'rmed. It did not 
modify them in any material way until 191 1. In that year a plan 
was adopted for allowing one day of rest in seven for each man in 
the continuous processes. The plan was to increase the force by 
one-sixth, and to grant one day of rest each week to the members 
of the crew by rotation through the week. 



THE TRUST PROBLEM 



351 



It is difficult to make a statement regarding wages, because the 
wage schedule of a steel millis a very complex affair. In 1907 I 
was given wage figures fronii the pay roll of a Steel Corporation 
mill in the Pittsburgh district. The figures included all of the men 
in five departments of a steel mill, including every necessary step 
in the process of turning pig iron into a finished steel product. 
There were 2,304 men included, and they were grouped according 
to earnings as follows: 125, or approximately five per cent, re- 
ceived over $5 a day ; 524, or twenty-three per cent, received be- 
tween $2.50 and $5.00, and 1,655, or seventy-two per cent, re- 
ceived $2.50 a day or less. 

In May, 1910, a general wage increase was announced by the 
Steel Corporation, which was described as averaging six per cent. 
This increase, so far as common labor is concerned, amounted to 
one cent an hour. The rate in 1908 was 16 1-2 cents an hour in 
the Pittsburgh district, and it is now 17 1-2 cents. This is the high- 
est rate paid by the Steel Corporation. In its Chicago^ mills the 
rate is 17 cents, and in its Birmingham!, Alabama, mills it is 13 to 
14 cents. 

Professor Chapin, in his study made for the Russell Sage Foun- 
dation, decided that a decent standard of living could not be main- 
tained in New York City by a family of five persons on an annual 
income of less than $800, and that there is no assurance that it can 
be maintained on an income below $900. Noi unskilled steel worker 
in America can earn even $800 a year on the rate that is being paid 
today. 

I now come to what I shall call the ameliorative efforts of the 
Steel Corporation — the things regarded by the Corporation as done 
on the credit side of the account. 

First in this list I shall place the campaign for safety. Steel 
mills are essentially dangerous places in which to work, not only 
on account of the vast tonnage of metal that is handled in a molten 
state, but on account of the great amount of complex machinery. 
The steel industry has an unenviable record of accidents to work- 
men. In 1907 several subsidiary companies of the United States 
Steel Corporation decided to adopt better methods of accident pre- 
vention. This new move contemplated two important and necessary 
lines of activity — installation of safety devices and the inculcation 
of habits of caution. A disinterested observer, who' was qualified 
to judge, has made the statement to me that the South Chicago 
plant of the Illinois Steel Company is the safest steel plant in the 
world. 



352 READINGS IN ECONOMIC PROBLEMS 

The hospital sen'ice of the Steel Corporation is now generally 
good. The developments of the last three years in this respect have 
been such as tO' bring the equipment well within the needs of the 
plants with which I am familiar. 

When Andrew Carnegie left the steel business, with the for- 
mation of the Steel Corporation in 1901, he established a fund of 
four million dollars, the income from' which was to be used to 
pension superannuated employees of the Carnegie Steel Company. 
The American Steel and Wire Company had a pension plan in 
operation when it became a part of the Corporation. In none of 
the other subsidiary companies, however, were pension systems in 
operation. In 19 to is was announced that these funds had been 
consolidated and the capital was tO' be increased by the Corporation 
to twelve million dollars, the income from it to be used to pension 
superannuated or disabled employees of the Steel Corporation. 
Since January i, 191 1, pensions have been available under the rules 
to all employees of the Corporation. 

In the period prior to the formation of the Steel Corporation, 
we find that in the Pittsburgh district there was a considerable 
amount of unionism in the steel industry. It is a mistake, however, 
to assume that the steel industry was ever thoroughly organized. 

The Carnegie Steel Company had eliminated unionism from its 
plaints in 1892, and of the large plants rolling rails and structural 
material, the Illinois Steel Company was the only one which came 
into the corporation in 1901 with union labor. 

There was a strike in 1901, soon after the formation of the 
Steel Corporation, in which the Illinois Steel Company plants be- 
came non-union, and the union also suffered the loss of some of the 
sheet and tin plants. 

During the strike of 1901 the executive committee of the Steel 
Corporation adopted a resolution in opposition to organized labor 
and declared that it would not permit the extension of it. After 
this it apparently adopted a policy looking to the extermination of 
organized labor. As a result, union labor has now been eliminated 
from' all of its properties, with the possible exception of its rail- 
roads. 

The present attitude of the Steel Corporation is one of abso- 
lute opposition to collective bargaining of any sort. And it has 
adopted a number of plans that are calculated to prevent an out- 
break of organization on the part of its employees. 

The pension plan, although a desirable thing in itself, has the 
effect of keeping mjen silent who might wish to protest against ex- 
isting conditions. In order to enjoy its benefits, the men must have 



THE TRUST PROBLEM 353 

served twenty years continuously in the employ of the corporation 
or of one of its subsidiaries. This effectively prevents any stoppage 
of work as a protest against anything considered unjust by the 
workmen, if they would keep their record such as to enable them 
to draw the pension in old age. The pension rules also specifically 
set forth the obvious truth that the Corporation does not give up 
its right to discharge its employees. There is nothing in it to pre- 
tect a man excepting his subservience to his superior officers, and 
the nearer he approaches toward twenty years of continuous ser- 
vice, the greater his subservience may conceivably be — for he might 
be discharged at the end of nineteen years and eleven months and 
his right to the pension would be forfeited. 

The so-called profit-sharing plan also has features designed to 
keep the employee from standing out vigorously in defense of what 
he may consider his rights. The rules plainly state that the yearly 
$5 bonus for each share of stock, and the additional bonus at the 
end of each five-year period, are to go, not as a matter of right to 
each employee who holds stock, but only to those whom the ex- 
ecutive officials may consider loyal. 

Under these two systems, then, a man will utterly fail of secur- 
ing the benefits offered if he is offensive to the administrative of- 
ficials. He may take his choice between exercising his right to 
register his objections to working conditions or to the labor con- 
tract and run the risk of losing his right to the benefits offered, 
or he may withhold his protests, if he has any, and establish his 
reputation for loyalty by keeping silent. The effect of this attitude 
of the Corporation tends, in a great many instances, to outweigh 
anything that it may do in the direction of providing better labor 
conditions. 

I have indicated the policies of the Steel Corporation, both good 
and bad. The effect of such a large aggregation of capital engaged 
in a single industry has been, it is very apparent to me, to make 
it possible for a large amount of money to be spent for improving 
plant conditions. I see no reason for assuming, however, that sim- 
ilar ends cannot be accomplished by smaller companies working 
together under a voluntary agreement. 

On the other hand, the formation of the Steel Corporation has 
not led to an alteration in labor conditions — meaning by labor con- 
ditions those things that usually enter into the labor contract — be- 
yond the recent movement for a six-day week. This is of especial 
importance in view of the enormous power over labor that was 
secured by the forming of the corporation. 



354 



READINGS IN ECONOMIC PROBLEMS 



Unionism is a very faulty and often a dangerous form of or- 
ganization. But we have so far worked out no better method of 
establishing justice in industrial matters than leaving it to the 
bargaining strength of the two parties to the contract. 

igi. The United States Steel Corporation and Labor. 

BY RAYNAI. C. BOIvUNG. 

The officers of the United States Steel Corporation and its sub- 
sidiary companies are not indifferent or self-satisfied as to con- 
ditions among their workmen. They are trying tO' improve those 
conditions as fast as it is practicable toi do so: They do' not main- 
tain that the lot of the steel-worker is easy or ideal ; but they do 
maintain that their workmen are treated as well on the whole as 
the workmen in any other industry and treated far better than ever 
before in the steel industry. 

The United States Steel Corporation has made it possible for 
every employee, even down to the ordinary laborer, to become an 
owner of its stock. In its iron mines, a thousand feet underground, 
I have seen men working with pick and shovel who proved, when 
questioned, to be stockholders in the company. Over 30,000 of the 
workmen are thus interested in the business. These employee stock- 
holders derive the following special benefits from the plant: (i) 
They are induced to save money, often for the first time in their 
lives. (2) For five years they receive a very high return upon 
their investments, and thereafter a large return for such small in- 
vestments. (3) They are induced to feel a direct interest in the 
business and to remember that their own interests are tied up 
with those of the company. (4) They are encouraged to remain 
with the company and to profit by permanent employment. 

Before there was any law in this country which required any- 
thing of the kind, the United States Steel Corporation established a 
system of voluntary accident relief absolutely regardless of legal 
liability. Every man injured and the family of every fnan killed 
is taken care of without need of lawsuits or even of any claims 
against the companies. Last year we were sued in only two-tenths 
of one per cent of the cases — showing how satisfactory this plan 
has proved to our workmen. 

The United States Steel Corporation has spent six years in the 
development of a. system of preventing accidents, which I confi- 
dently believe is not sui-passed anywhere in the United States or 
abroad. The system which has been worked out comprehends all 
manner of safety devices and other material safeguards, but, above 



TUB TRUST PROBLEM 355 

all, it is based upon the development of an earnest, constant and 
determined effort to prevent work accidents — all the way from the 
president down to the lowest workman. 

In six years the number of serious and fatal accidents among 
workmen of the United States Steel Corporation has been reduced 
forty-three per cent, and more than 2,000 men each year are saved 
from injury or death in work accidents which would have hap- 
pened to them under old conditions. 

At all our mills, mines and plants provision is made for the best 
surgical and hospital treatment obtainable for employees injured 
in our work. In the mining regions the arrangements include med- 
ical attention for the men and for their families. 

By an arrangement under which $8,000,000 is being added to 
the $4,000,000 originally given by Mr. Andrew Carnegie, there has 
been provided a permanent fund of $12,000,000, from the income 
of which all superannuated employees of the United States Steel 
Corporation who have remained twenty years in its service are 
assured support for the rest of their lives. The smallest pension 
given is $12 a month and the largest $100— thus the lowest paid 
workman will receive enough to- provide for his necessities and the 
high-salaried employees do not become a drain on the fund. 

The most recently organized work for improving conditions 
among employees of the Steel Corporation is in sanitation and wel- 
fare. This work is being organized in the sam^e manner in which 
the system of accident prevention has been worked out and with 
the same theory of bringing these matters home to the heads of 
departments, superintendents and foremen, and above all, to the 
men themselves. 

This work includes sanitary disposal of sewage and fecal matter, 
provision for pure water in all plants and houses, the protection of 
food supplies, especially milk and meat, and the installation of 
wash-rooms, shower-baths and lockers for a change of clothing. 

All our companies are donors to hospitals, churches, clubs, li- 
braries and other organizations established by the communities and 
the workmen. It is the aim of our managers to make their plants 
a benefit to the communities in many ways additional to the wages 
paid the workmen. 

Few people know how much our plant managers spend in car- 
rying employees through hard times when there is not work enough, 
in furnishing groceries and coal, in paying rent and insurance to 
assist sick employees, in giving a little Christmas cheer to those 
who are in misfortune. 

Please do not understand me to say that all of these things are 



356 READINGS IN ECONOMIC PROBLEMS 

done in all the subsidiary companies or in any of them. Many of 
these things are done in all of the companies, and all these and 
other means of making better the conditions of its workmen are on 
trial and under consideration somewhere in the Steel Corporation, 
with the hope and the purpose of eventually bringing all the com- 
panies and all the plants to the best standards. 

The hours of labor in the steel mills of this country grew up 
with the industry. They were not established by the United States 
Steel Corporation, and they can only be changed slowly where 
changes are shown to be practicable and desirable. 

The twelve-hour day exists among only twenty-five per cent of 
the workmen employed by the United States Steel Corporation, al- 
though in the blast furnaces and rolling mJlls, to which the twelve- 
hour day is largely confined, probably half the workmen have a 
tv/elve-hour day, more or less modified by periods of rest. The 
steel industry adopted the two-turn system long before the United 
States Steel Corporation was organized. The same system pre- 
vails in Germany, where labor conditions have probably been made 
the subject of more state supervision than anywhere else in the 
world. Personally, I am satisfied that the lightening of labor by 
machinery and the rest periods prevent the twelve-hour day from 
doing any physical injury to the workmen. Since the Steel Corpor- 
ation was organized the price of its products has been reduced on 
the average about ten dollars a ton. Meanwhile, wages have been 
increased twenty-five per cent. Yet the efficiency of labor has not 
increased. It would be easy to substitute an eight-honr day for 
twelve hours if the workman could accept two-thirds his present 
wages, but the workman, like everyone else, prefers longer hours 
to lower wages ; and there are more applicants for twelve-hour 
positions than for those where the work is only ten hours, because 
the former pay better. This is an economic problem which con- 
fronts the industry and time is required for its solution. 

The question of organization among the workmen in the steel 
industr}^ is too large, too serious and too difficult a subject to dis- 
cuss in a small portion of a short address. It is a subject where 
discussion too often engenders ill feeling and most unfortunate 
bitterness, where differences of opinion are seldom accepted with 
patience or tolerance on either side. For myself, I believe we must 
get rid of lawlessness and of violence and oppression on both sides 
and wherever they appear. I believe no agreement can be reached 
until the two parties are both prepared to seek an agreement on 
the basis of mutual advantages offered and of equal responsibilities 
assumed. 



THB TRUST PROBLEM 357 

H. THE SHERMAN ANTI-TRUST ACT IN THEORY AND 

PRACTICE. 

192. The Sherman Anti-Trust Act.* 

Section i. Every contract, combination in the form of trust or 
otherwise, or conspiracy, in restraint of trade or commerce among 
the several states, or with foreign nations, is hereby declared to 
be illegal. Every person who shall make any such contract or en- 
gage in any such combination or conspiracy, shall be deemed guilty 
of a misdemeanor, and, on conviction thereof, shall be punished 
b}^ fine not exceeding five thousand dollars, or by imprisonment 
not exceeding one year, or by both said punishments, in the dis- 
cretion of the court. 

Section 2. Every person who shall monopolize, or attempt to 
monopolize, or combine or conspire with any other person or per- 
sons, tO' monopolize any part of the trade or commerce among the 
several states, or with foreign nations, shall be deemed guilty of 
a misdemeanor, and, on conviction thereof, shall be punished by 
fine not exceeding five thousand dollars, or by imprisonment not ex- 
ceeding one year, or by both said punishments, in the discretion of 
the court. 

193. The Meaning of Restraint of Trade. 

BY CHIEF-.TUSTICE EDWARD D. WHITE. 

In substance, the propositions urged by the Government are 
reducible to this : That the language of the statute embraces every 
contract, combination, etc., in restraint of trade, and hence its text 
leaves nO' room for the exercise of judgment, but simply imposes 
the plain duty of applying its prohibitions to every case within" its 
literal language. The error involved lies in assuming the matter 
to be decided. This is true because, as the acts which may come 
under the classes stated in the first section and the restraint of trade 
to which that section applies are not specifically enumerated or de- 
fined, it is obvious that judgment must in every case be called into 
play in order to determine whether a particular act is embraced 
within the statutory classes and whether, if the act is within such 
classes, its nature or effect causes it to- be a restraint of trade within 
the intendment O'f the act. To' hold to the contrary would require 
the conclusion either that every contract, act, or combination of any 
kind or nature, whether it operated a restraint on trade or not, was 
within the statute, and thus the statute would be destructive of all 

* The two sections given form the essential part. 



358 READINGS IN ECONOMIC PROBLEMS 

right to contract or agree or combine in any respect whatever as to 
subjects embraced in interstate trade or commerce, or if this con- 
clusion were not reached, then the contention would require it to 
be held that as the statute did not define the things to which it re- 
lated and excluded resort to the only means to which the acts to 
which it relates could be ascertained — the light of reason — the en- 
forcement of the statute was impossible because of its uncertainty. 
The merely generic enumeration which the statute makes of the 
acts to which it refers and the absence of any definition of restraint 
of trade as used in the statute leaves room for but one conclusion, 
which is that it was expressly designed not to unduly limit the ap- 
plication of the act by precise definition, but while clearly fixing a 
standard — that is, by defining the ulterior boundaries which could 
not be transgressed with impunity — ^tO' leave it to be determined by 
the light of reason, guided by the principles of law and the duty 
to apply and enforce the public policy embodied in the statute in 
every given case, whether any particular act or contract was within 
the contemplation of the statute. 

194. Unreasonable Restraint of Trade. 

BY JUSTICE J. M. HARLAN. 

But my brethren, in their wisdom, have deemed it best to pur- 
sue a different course. They have now said tO' those who condemn 
our former decisions and who object tO' all legislative prohibitions 
of contracts, combinations, and trusts in restraint of interstate com- 
merce, "You may nozij restrain such commerce, provided you are 
reasonable about it; only take care that the restraint is not undue." 
The disposition of the case under consideration, according to the 
views of the defendants, will, it is claimed, quiet and give rest to 
"the business of the country." On the contrary, I have a strong 
conviction that it will throw the business of the country into con- 
fusion and invite widely extended and harassing litigation, the in- 
jurious effects of which will be felt for many years to come. When 
Congress prohibited ezfery contract, combination, or monopoly in 
restraint of commerce, it prescribed a simple, definite rule that 
all could understand, and which could be easily applied by every 
one wishing to obey the law and not to conduct his business in 
violation of the law. But now, it is to be feared, we are to have, 
in cases without number, the constantly recurring inquiry — diffi- 
cult to solve by proof — whether the particular contract, combina- 
tion, or trust involved in each case is or is not an "unreasonable" 
or "undue" restraint of trade. Congress, in effect, said that there 



THB TRUST PRO BLUM 



359 



should be no restraint of trade, in any form, and this court solemnly 
adjudged many years ago^ that Congress meant what it thus said in 
clear and explicit words, and that it could not add to the words 
of the act. But those who condemn the action of Congress are now, 
in effect, informed that the courts will allow such restraints of in- 
terstate commerce as are shown not tO' be unreasonable or undue. 

195, An Interpretation of the Court Decisions. 

BY THEODORlv F,. BURTON. 

The particular feature of these decisions to which most signifi- 
cance should be attached is the interpretation placed by a majority 
of the Court upon the Sherman Anti-trust Law. Much difference 
of opinion exists as to the ultimate effect and scope of this inter- 
pretation. The absence of protest by business interests of the 
country, and the sudden rise in the stock market following the de- 
cision in the Standard Oil Case, might lead to the inference that 
the Sherman Law has been seriously emasculated. That this view is 
alsO' shared by somie legislator, is shown by the fact that a number 
of amendments, intended to restore to- the Sherman Law its original 
meaning, as they had interpreted it, were introduced in Congress 
immediately after the Standard Oil decision was rendered. On 
the other hand, it is believed by many, that the law has been made 
to harmonize with existing conditions, and has been strengthened 
and made more effective as a result of the new interpretation. 

Chief Justice White, who' rendered the majority opinion in both 
cases, holds that the words ''restraint of trade" and "monopolize" 
should have the meaning which they had at common law when the 
Anti-trust Ace was passed. In the a:bsence of any exact definition 
of these terms, he holds that they should be interpreted in the light 
of reason, as they were at common law. Applying this standard, he 
holds that not all contracts in restraint of trade are illegal, but only 
thoffe contracts which necessarily develop monopoly, control prices, 
and limit output. 

The whol6 controversy over this opinion of the Supreme Court 
turns around the question whether it has read into the Sherman 
Law the words "unreasonable" or "undue" before the words "re- 
straint of trade," and "monopolize." This is the premise on which 
the dissenting opinion of Justice Harlan is based, and if it is true 
then there is no escape from the conclusion that the commonly ac- 
cepted interpretation of its meaning has been erroneous. 

The Supreme Court in both decisions several times uses the 
words "undue" or "unduly" in conection with the term^ "restraint 



36o READINGS IN ECONOMIC PROBLEMS 

of trade." Justice Harlan calls attention to the fact that in the 
Standard Oil case the court practically informs the subsidiary com- 
panies that they may join in an agreement to restrain co^mmerce 
among the states, provided such restraint be not "undue." On the 
other hand, viewing both decisions in their entirety, we may inter- 
pret them as showing that the intention of the court was simply to 
remove from the scope of the law only such contracts or agreements 
as are necessary, normal, and helpful to promote legitimate busi- 
ness. 

Justice Harlan in his dissenting opinion in the Standard Oil 
case maintains that the court has injected the word "unreasonable" 
into the Sherman Law, and in so doing has not only reversed the 
decision of the court in preceding cases, but has indulged in judicial 
legislation. He asserts that the Court has in effect amended the 
Sherman Law, which right belongs to Congress alone, and not to 
the courts. 

In reading the conflicting opinions in the two cases it appears 
that the difference between the learned judges is largely one of 
pharaseology. Justice Harlan avers that in defining what is pro- 
hibited by the Sherman Law the Court, in the most unequivocal 
terms, has repeatedly held that combinations or acts in restraint 
of trade were alike violative of the statue whether such acts were 
considered unreasonable, or reasonable and productive of salutary 
results in the transaction of business. On the other hand, Chief 
Justice White, in both decisions maintains that the interpretation of 
the Sherman Law adopted by the Court is in line with, and not a 
reversal of, the earlier position of the Court, and bases his con- 
tention upon the definition of the term "restraint of trade." It is 
maintained by him that it is of fundamental importance to define 
at the very outset what is restraint of trade, and that this question 
must be determined in accordance with the rule of reason. In 
applying the. rule of reason, resort may be had to the decisions of 
the common law. It thus appears that in the assertion of this dis- 
tinction, namely, that it should be first determined what is restraint 
of trade, a conclusion may be reached by the courts that acts 
which have been commonly regarded as contrary tO' the Anti-trust 
Law, because they involve the elimination of competition, are never- 
theless not in restraint of trade. The Chief Justice also lays stress 
upon the different conceptions of economic conditions accepted from 
time to time, and refers to the fact that acts which were at one time 
deemed to be of such a character as to justify the inference of 
wrongful intent, were at another period thought not to be of that 
character. 



THB TRUST PROBLEM 361 

The Court in these recent trust cases was confronted with the 
difficult problem of giving a more liberal definition of the term 
"restraint of trade" and yet maintaining substantial consistency with 
its former decisions. On the one hand, it must interpret the law in 
such a way that the word unreasonable should not be understood 
to have been inserted before the words "restraint of trade" and 
"monopolize." On the other hand, it must refrain from giving 
such a narrow interpretation as would make the law destructive 
of all normal business methods. Careful consideration of the two 
opinions rendered by the Court would seem tO' warrant the belief 
that it has successfully avoided these two pitfalls, and has simply 
asserted that, in deciding upon such cases, it is permitted under the 
law. to use its judgment as to whether the acts or transactions of 
any defendant are such as would restrict competition tO' an extent 
detrimental to public welfare. If this has been accomplished by 
the Court, then undoubtedly the Sherman Law has been greatly 
strengthened instead of emasculated as a result of this interpre- 
tation. The narrower viev/ of the law is so drastic as to prohibit, 
if applied, those business methods which tend tO' promote rather 
than to restrain interstate trade and commerce. Under such an 
interpretation, legitimate business might be declared illegal if 
brought into court, and guilty parties to an illegal combination might 
on technicalities escape prosecution. 

196, Dissolution of the Standard Oil Company. 

Standard Oil Company (of New Jersey) 
26 Broadway, 

New York, July 28, 191 1. 
To the Stockholders of the 

Standard Oil Company (of. New Jersey) : 
Obedience to th^' final Decree in the case of the United States 
against the Standard Oil Company (of New Jersey), and others, 
requires this Company, to distribute, or cause to be distributed, 
ratably, to its stockholders the shares of stock of the following cor- 
porations, which it owns directly or through its ownership of stock 
of the National Transit Company, to wit : Anglo-American Oil Com- 
pany, Limited; The Atlantic Refining Company; Borne-Scrymser 
Company ; The Buckeye Pipe Line Company ; Chesebrough Manu- 
facturing Company, Consolidated ; Colonial Oil Company ; Con- 
tinental Oil Company; The Crescent Pipe Line Company; Cumber- 



362 RBADINGS IN ECONOMIC PROBLEMS 

land Pipe Line Company, Incorporated; The Eureka Pipe Line 
Company ; Galena-Signal Oil Company ; Indiana Pipe Line Com- 
pany ; National Transit Company ; New York Transit Company ; 
Northern Pipe Line Company ; The Ohio' Oil Company ; Tlie Prairie 
Oil and Gas Company ; The Solar Refining Company ; Southern 
Pipe Line Company ; South Penn Oil Company ; South West Penn- 
sylvania Pipe Lines; Standard Oil Company (California) ; Stand- 
ard Oil Company (Indiana) ; The Standard Oil Company (Kan- 
sas) ; Standard Oil Company (Kentucky) ; Standard Oil Company 
(Nebraska) ; Standard Oil Company of New York; The Standard 
Oil Company ( Ohio ) ; Swan & Finch Company ; Union Tank Line 
Company ; Vacuum Oil Company ; Washington Oil Company ; 
Waters-Pierce Oil Company. 

Such distribution will be made to the stockholders of the Stand- 
ard Oil Company (of New Jersey) of record on the ist day of 
September, 191 1 ; and, for that purpose, the transfer books of the 
Company will be closed on the 31st day of August, 1911, at 3 o'clock 
P. M., and kept closed until the date when said stocks are ready 
for distribution, which it is expected will be about December i, 
1911. 

Notice of the date when said stocks are to be distributed and of 
the re-opening of the books will be duly given. 

Yours very truly, 

H. C. Folger, Jr., 

Secretary. 

197. The Result of the Dissolutions. 

BY ARTHUR JEROME EDDY. 

Everybody knows what disintegration means, it means disso- 
lution — ^"smashing 'em," in the language of the street. 

The Standard Oil Compan}^ has been disintegrated into some 
thirty-five, more or less — chiefly less — independent and supposedly 
competing companies. 

The Tobacco Company has been disintegrated into fourteen, 
more or less, independent and — supposedly — competing units. 

The net result to the public so far has been higher prices for 
many of the products of the one and no lower prices for any of 
the products of the other. 

The net result to many small stockholders has been losses. 

The net result to "insiders" — the men against whom public 
clamor was raised — has been golden opportunities for profit in the 



THE TRUST PROBLEM 



363 



buying and selling of subsidiary stocks long before stockholders 
and the public could possibly form any accurate notions of their 
real value. 

To illustrate — ^when the Standard Oil Company of New Jersey 
— the trust — was dissolved by order of court the stockholders of 
that company received pro rata fractional interests in all the sub- 
sidiary companies, and for the first time thousands of men and 
women all over the country learned of the existence of those thirty- 
five companies. By no possibility could these scattered stockholders 
form accurate opinions regarding the values of the fractional shares 
issued to them; only the men in control of the industry were in a 
position to know. What has been the result? The stockholders 
and public have sold and bought in ignorance, losing both ways. 
Take the Standard Oil Company of Indiana, one of the subsidiary 
compaines. It was capitalized at $1,000,000; the amount cut no 
figure so long as all its stock was held by the trust, but when the 
trust was dissolved its many stockholders received each his frac- 
tional pro rata share in the Indiana Company. There was a gen- 
eral impression the stock of this company was worth far more 
than par, but how much? Only the insiders could tell. As a result 
many stockholders who were in the dark sold their interests at less 
than a fifth of what the stock sold for inside a few weeks. 

A few days ago the Indiana Company voted to increase its cap- 
ital stock from one million dollars to thirty millions and to distribute 
the $29,000,000 to its stockholders as a stock dividend, and it now 
appears that the company is earning at least ten millions a year, or 
33 1/3 per cent on the new capitalization, but it is stated in the 
press the "officers refuse toi give any information on this point." 

Disintegration of trusts and large corporations simply because 
they are large is a senseless proposition, because both are here to 
stay in some form. The Sherman Law was passed in 1890. For 
more than ten years few attempts were made to enforce it against 
large corporations. Then, in response to popular clamor, due to 
many flagrant abuses, came a period of indiscriminate "trust-bust- 
ing." Already there are signs of reaction ; the pendulum is swing- 
ing back ; it is found the Sherman Law hits large and small, good 
and bad, labor unions and capital unions alike. At best the law is a 
destructive measure, and the demand now is for constructive legis- 
lation. But this demand so far has not assumed any very definite 
shape. 



364 READINGS IN nCONOMIC PROBLEMS 

1. PROPOSALS FOR CO'NTROTXING THE TRUSTS. 
198. A Proposal of an Interstate Trade Commission. 

BY fiRUCE WYMAN. 

I believe that it is high time that we should give up the hope- 
less attempt to- destroy by law, without making any distinctions, all 
aggregations of capital, and that we should adopt in its place the 
promising program of the regulation of the whole situation by 
appropriate law. The ideal condition, to my way of thinking, is 
to have monopoly, where that is the more effective form, and com- 
petition where that is the natural thing. To that end, the law 
should do its best to see to it that there shall be an open market in 
which that type which is the economically advantageous one shall 
survive. 

What I would urge would be not a repeal of the Sherman Act ; 
I would leave that for its appropriate work of dissolving combi- 
nations in restraint of trade. But I would supplement it by an act 
to regulate concerns that have established a control of their market. 
My own idea in drafting such an Interstate Trade Act would be to 
follow the Interstate Commerce Act, as far as that could be done. 
In doing this, we should have the advantage of using a well-tested 
code. 

First. — ^Establish an Interstate Trade Commission of seven miem- 
bers, with salary and tenure like the Interstate Commerce Commis- 
sion. 

Second. — Require every manufacturing and trading concern of a 
certain size tO' register itself with the commission in order to get 
a federal license toi engage in interstate commerce. Demand oi 
every concern registering a full statement of its condition, includ- 
ing particularly its capitalization and the basis of that capitalization. 
Require each registered concern tO' make an annual report, including 
its balance sheet, income account, volume of output, value of out- 
put, etc. 

Third. — Give the Interstate Trade Commission power to regu- 
late all concerns that have substantial control over their market. 
This can be determined in the first instance by the commission upon 
the basis of the returns that have been filed by the various concerns 
upon taking out their federal licenses. Concerns that have a sub- 
stantial control over their market are so affected with a public in- 
terest that they may properly be controlled to the extent that the 
public services are. 



THB TRUST PROBLEM 365 

Fourth. — Define what are unfair practices ; for destructive com- 
petition in a monopolistic business has various formis, such as (i) 
sening in one locality at discriminating- prices in order to force out 
local competition ; ( 2 ) selling one grade or variety at disproportion- 
ate prices in order to force out competition; (3) refusing to sell to 
purchasers who will not agree not to deal with a rival ; (4) imposing 
terms in leases that the lessee shall not buy anything from- any one 
else; (5) fixing the terms and prices upon which the product shall 
be resold; (6) establishing a monopoly by requiring the purchase of 
other things fromi the patentee than the patented article. In other 
words, prohibit making discriminations against customers who re- 
fuse to obey the dictates of the trusts. Make this plain by requiring 
sale to all purchasers upon equal terms under substantially similar 
circumstances. 

Fifth. — Give the Interstate Trade Commission power toi give 
relief against extortionate charges. At first, confine its power over 
prices to reducing prices against which specific complaint has been 
made to- it, but in disposing of such complaints let it fix the price 
in question for the future. Provide that full returns shall be made 
as to the outstanding securities and actual capital of the concerns 
subject to the act as the basis for such regulation. But at first 
provide that dividends shall not be reduced when the concern in 
question is not making more than a fair per cent of profit upon 
each transaction. I would go very slowly in this matter at first, 
giving the commission only power to give relief in particular cases 
of outright extortion. 

Sixth. — Persons aggrieved by unfair competition or by extor- 
tionate prices may bring complaint before the Interstate Trade 
Commission, which shall give appropriate relief. Aggrieved per- 
sons may alsO' bring suit in courts for unfair competition or extor- 
tionate prices. 

This program ought to accommodate the conflicting interests in- 
volved in this issue. It should be the abuse, not the possession of 
monopoly, that should subject a concern to prosecution under the 
law in the future. The essence of the wrong of monopolization is 
the excluding of others from the market, not the mere growth of 
the concern itself, by successful activity. In other words, it is un- 
natural growth by unreasonable tactics that should be punished, not 
natural growth by deserved success. Monopolization by exclusive 
policies and unjustifiable discrimination is the thing to be prevented. 
Make the law as big as the business and the problem is solved. 



366 READINGS IN ECONOMIC PROBLEMS 

199. Control of Monopoly by a Trade Commission. 

BY WILLIAM DUDLEY FOULKE. 

The remedy for present trust evils which I would suggest in 
addition to appropriate fines and the imprisonment of guilty per- 
sons, would be to place the injurious combine under the control of 
the Trade Commission as completely as railroads are subjected to 
the Interstate Commerce Commission. 

What is the character of that* control ? By the "Act to Regulate 
Commerce," passed February, 1887, and by its amendments it is 
provided that all charges made for any service by common carriers 
shall be just and reasonable. Unreasonable charges are prohibited 
and declared unlawful. The same jurisdiction should be conferred 
upon the Trade Commission as to prices of the products or services 
of interstate monopolies. By the commerce act common carriers 
must make just and reasonable classifications. So' should industrial 
monopolies be required to do. Common carriers are forbidden 
to make special rates or rebates but must charge all alike ; they can 
grant nO' undue preference or advantage to* anyone to the prejudice 
or disadvantage of another. The same provision should apply to 
every monopoly. Common carriers must keep open for inspection 
their rates and charges. The industrial monopolies should be bound 
by the same rule as to- their price lists except in cases for which the 
commission should decide that tables of prices are impracticable. 

If the Interstate Commerce Commission finds that the rates 
charged by common carriers are unjust, unreasonable, or unjustly 
discriminatory or prejudicial, the commission is authorized to pre- 
scribe what shall be just and reasonable charges and may fix a 
maximum rate. The Trade Commiission should be authorized toi do 
the same thing in respect tO' industrial monopolies, prescribing not 
only the maximum' rate but also the minimum prices in cases where 
an unjust reduction may be used for the oppression of competitors. 

If any person shall induce a common carrier to discriminate un- 
justly in his favor, such person may be fined or imprisoned. If any- 
one dealing with an industrial monopoly secures an unjust discrim- 
ination of the same kind, similar penalties should be imposed. 

By the Act to Regulate Commerce the common carrier cannot 
withhold its cars or other facilities for transportation and may be 
compelled by mandamus to furnish them, at reasonable rates, equally 
to all the world. An industrial monopoly ought to be equally pre- 
vented from withholding its product, especially where that product 
is necessary to the life and well-being of society. An industrial 



THB TRUST PROBLEM 367 

monopoly must become like the common carrier, the servant of the 
community at large. 

If a common carrier may not render dangerous or inadequate 
service, why may not an industrial monopoly be required to furnish 
goods that are not deleterious toi the consumer and are of standard 
quality? Quality too should be under the control of the commis- 
sion. 

Whenever a common carrier has a controversy with his em- 
ployees, a board of arbitration is provided for, whose award may 
be enforced in equity. No' employer can prevent his employee from 
becoming a member of a labor union or unjustly discriminate 
against him because of such membership. Similar provisions should 
be made in regard to industrial monopolies. Railroads are required 
to furnish safety appliances for the protection of their employees 
and the public as well as limit the hours of continuous service for 
trainmen. Similar protection should be given in all monopolized in- 
dustries and such requirements made as toi hours of labor, the 
employment of women and children, and the conditions of labor 
and the minimum wages therefor, as will secure health and reason- 
able well-being of employees. 

In other words, every power exercised by the Interstate Com- 
merce Commission over common carriers should be applied, wher- 
ever it can be made applicable, to industrial and commercial mon- 
opolies which have acted in unreasonable restraint of trade. 

Indeed, the power of the Trade Commission may properly go 
even farther in respect to these delinquents. Railroad companies 
are, up to a certain extent, natural monopolies. It is not always 
their fault if competition be suppressed. But if competition be wil- 
fully stifled by industrial monopolies the power to control them 
may justly become more stringent and drastic than the power to 
control common carriers. Other governments have not hesitated 
to assume drastic control over monopolies. In May, 1910, the Ger- 
man Reichstag passed a law regulating the potash industry, a mon- 
opoly, since Germany controls the world's output of potash and 
has the only known deposits. There were fifty-four companies own- 
ing and operating these deposits and the production was excessive. 
The government then fixed the proportionate part of the demand 
which each corporation was permitted to produce and established 
the maximum and minimum prices. A tribunal was appointed to 
reapportion from time tO' time the production of the several com- 
panies according tO' the demand. An elaborate system regulates 
the industry and protects the labor employed in the business. Sim- 
ilar regulations are contemplated or are in operation in regard to 



368 READINGS IN BCONOMIC PROBLEMS 

other industries. Wherever Hke conditions prevail in this country 
the Trade Commission should be invested with power to invoke 
similar remedies. If the monopoly produces too little, steps should 
be taken to increase the output ; if too much, to restrain the overpro- 
duction. 

Is it not evident that regulation and control of this description 
is infinitely better for the public, better for employees, and better 
for independent competition than the mere dissolution of these 
organizations to be followed inevitably by their reappearance in 
newer and more inaccessible forms? 

200. Prescription of Conditions for Interstate Commerce. 

BY JOHN SHARP WILLIAMS AND ROBp;RT R. REED. 

A Bill to prescribe the conditions under which corporations may 
engage in interstate commerce and to provide penalties for 
otherwise engaging in the same. 

Be it enacted by the Senate and House of Representatives of 
the United States of America in Congress assembled. That no cor- 
poration shall engage in commerce between the States or Territories 
or in the. District of Columbia by the purchase, sale, or consign- 
ment of any article of commerce, or otherwise, directly or indi- 
rectly — 

First — ^Unless it is organized under laws with a charter that — 

(a) State the business in which it is authorized to engage and 
the properties it is authorized to acquire ; 

(b) Provide that it shall have only such powers as are inci- 
dental to such business, and shall not have any power to hold the 
stock of any other corporation or association, to do any act or 
thing in restraint of trade, or to do anything outside of the state 
of its incorporation which it is not permitted to do therein ; 

(c) Provide that all its stockholders shall have an equal right 
to vote according to the number of shares held by them, respectively, 
at all meetings and for all directors, subject to any general limita- 
tion on the number of votes that may be cast by a single stock- 
holder ; 

(d) Provide that no- other corporation, association, or partner- 
ship shall have any vote or voice, directly or indirectly, in its affairs 
and that no person representing, directly or indirectly, any com- 
peting business, as owner, stockholder, officer, employee, or agent 
thereof, or otherwise shall have any such vote or voice, directly or 
indirectly, in its affairs or be eligible as a director or officer thereof ; 



THE TRUST PRO BLUM 369 

(e) Provide that its capital stock shall be fully paid or pay- 
able and permit it to be paid in property or services only when the 
value of such property or services has been determined according to 
the fact upon competent and specific proof under oath filed in a 
designated public office ; 

(f) Limit its surplus at any time to fifty per centum of its 
outstanding capital stock and its indebtedness at any time to not 
more than its outstanding capital stock and surplus ; 

(g) Provide that such corporation shall by an amendment 
of its charter be subject to and comply with, and, if necessary, shall 
accept any requirement that may be made by the state of its in- 
corporation and any requirement that may be imposed by Congress 
as a condition of its right to engage in interstate commerce. 

Second — Unless it is conducted and managed in conformity 
with the said provisions and limitations, and is organized under the 
laws of a State, Territory, or District in which its executive offices 
are located and its directors' meetings regularly held. 

Third — If it, directly or indirectly, of itself or in connection 
wnth others, destroys or seeks unfairly to stifle fair comipetition in 
any part of the United States in the manufacture, production, min- 
ing, purchase, sale, or transportation of any articles of commerce 
not the subject of any patent, copyright, or trademark held by it 
either by making or effecting exclusive contracts, rights, or priv- 
ileges relating thereto, by restricting its customers or other persons 
with regard to price, by securing the monopoly or control of raw 
material or sources of supply or of any business connected there- 
with, by temporarily or locally reducing prices with intent to stifle 
competition, by accepting rebates, or by any other act, device, or 
course of business that is unfair and tends to secure an unfair ad- 
vantage and unreasonably and unfairly to destroy competition. 

Sec. 2. That eveiy contract made in violation of this act shall 
be void, and no corporation or association shall bring or maintain 
any suit or proceeding in any court of the United States unless it is 
organized, conducted, and managed as required by section one, nor 
shall this provision prevent the removal of any such suit or pro- 
ceeding to such courts where such defense may be available to the 
defendant. 

Sec. 3. That the prohibitions of section one and section two 
shall apply to any association membership in which it is represented 
by shares, and the word "association" used in this act shall include 
any joint-stock company, business, trust, estate, or any form of as- 
sociation used for business purposes ; but, said prohibitions shall 
not apply to any corporation or association not engaged in busi- 



370 



READINGS IN ECONOMIC PROBLEMS 



ness for profit or engaged exclusively in any one or more of the 
following businesses : Education ; a railroad or other comimon or 
public carrier Oif property or persons or messages ; banking, insur- 
ance; the supply of water, light, heat, or power; or engaged ex- 
clusively and independently in any business or businesses the sub- 
stantial bulk of which is carried on in foreign countries or exclu- 
sively in any one State or Territory or District, and which does 
not involve the transmission of goods from one State or Territory 
or District to another, nor the purchase, sale, or consignment of 
articles commonly the subject of commerce between the States and 
Territories, and actualy intended for or becoming the subject of 
such commerce. 

Sec. 4. That no person or persons shall form, operate, or act 
as or for a corporation or association for the purpose or with the 
effect of violating this act, or conspire thereto and of themiselves or 
by co-conspirator dO' any act or thing to effect such conspiracy. 

Sec. 5. That every corporation, association, trust, or person 
violating this act shall be subject, upon conviction thereof, in case 
of a corporation or association, tO' a fine not exceeding ten per 
centum o^f its capital stock, or to a perpetual injunction against en- 
gaging in interstate commerce, or both, and in the case of a person, 
to a fine not exceeding ten thousand dollars for each such violation, 
and, if the violation is willful with intent to defraud or to- create a 
monopoly or unfairly to^ stifle competition, to such fine and imprison- 
ment for not exceeding five years. 

Sec. 6. That the act of February eleventh, nineteen hundred 
and three, relative to the expedition of certain suits in equity, and 
sections four and five of the act of July second, eighteen hundred 
and ninety, known as the Sherman Anti- Trust Act, shall apply to 
all proceedings and suits in equity under this act. 

Sec. 7. That the purchase, sale, or consignment of any article 
intended to become and actually becoming an article of commerce 
Ibetween the States or Territories, shall be deemed to be an act of 
engaging in such commerce under this act. 

Sec. 8. That the foregoing provisions of this act shall take 
effect January first, nineteen hundred and thirteen, but shall not 
applv to corporations or associations having a capital stock and sur- 
plus under ten million dollars until January first, nineteen hundred 
and fourteen. 

Sec. 9. That any corporation or association organized, con- 
ducted, and managed as required by section one shall, after the 
passage of this act, be entitled to engage in commerce between the 
States and Territories, and to carry on its authorized business rel- 



THE TRUST PROBLEM 



371 



ative to such conTimerce in any part of the United States, subject 
to the provisions of this act and to all present laws of the United 
States, and tO' future acts of Congress, and tO' the general laws and 
taxing power of any State, Territory, or District in which it may 
do business. 

201. A Socialist View of State Regulation. 

BY JOHN SPARGO AND GKORCxE LOUIS ARNER. 

The only method of coping with the evils of monopoly left to 
those who oppose public monopoly is that of regulation by the State. 
Those who urge this method argue that as the corporation is a cre- 
ature of the State, an artificial person, the State, is in a special 
sense responsible for it. The form of regulation which ofifers the- 
greatest promise and is most generally advocated is federal incor- 
poration of concerns doing an interstate business, with the right to 
regulate prices exercised by a commission similar to the Interstate 
Commerce Commission, which has the power to regulate railway 
rates. 

vSuch regulation will probably be extensively tried, and the trial 
will mean that the theory of the possibility of conducting industry 
upon a competitive basis is definitely abando^ned. The question of 
regulation v/ill then resolve itself into a test of strength between 
the industrial State and the political State. If the industrial State 
with its plutocracy is able to- dictate tO' the political State and control 
the commission charged with the task of regulating the corpor- 
ations, then dividends will continue tO' be paid on watered stock, 
prices will still remain at the point of highest net return and the 
corporations will be more safely entrenched than before. 

From the Socialist point of view, the objections to regulation 
are its inherent wastefulness, its bureaucratic nature and its in- 
efifectiveness. 

(i) Regulation is inherently uneconomical in that practically 
all the labor it involves is unproductive and unnecessary, or, at 
least, only necessary to avoid the evils of a defective system which 
might be replaced by a better one. Regulation really mieans that, 
in addition tO' the social labor necessary to production, society must, 
through the State, expend still further social labor, simply to com- 
pel the monopolist to observe the rules which society in the exercise 
of its sovereignty has decided shall govern production. These rules 
the monopolist is constantly tempted to- break, because at every 
turn they hamper him in his effort to gather profits. No one has 
yet made a serious and exhaustive study of this question and at- 



372 READIXGS IX ECOXOMIC PROBLEMS 

tempted to compute the cost to the nation of the measure of regu- 
lation we have already tried. Hiat the sum would" be enomious if 
computed is evident. 

(2) The natural and instinctive tendency of the monopolist is 
to strive to evade all restrictions imposed upon him which in any 
manner interfere with his profits. To make the regulations adopted 
effective, it is necessary to demand from the monopolist a vast 
amount of information concerning his business. To be of any 
serv'ice this information must be examined, tabulated and checked 
— for which work the maintenance of an expensive bureau is neces- 
sar>-. To detect and frustrate attempts to evade the law, and to 
punish violations of the law, inspectors, detectives, attorneys and 
prosecutors must be employed in large numbers. 

(3) Regulation must ultimately fail for the reason that the 
gain to the monopolist which evasion or violation of the regulations 
imposes upon him, when it can be accomplished with safety, is an 
incentive against which the State is unable to contend successfully. 
It is the same principle which makes it almost impossible for the 
authorities to prevent the sale of liquor in a prohibition State. So 
long as the State permits the private monopolist to exist, it can ac- 
complish little of permanent value by imposing restrictions upon 
him which make it impossible for him to obtain the profits he would 
otherwise receive. He will bribe the State's officials where possible, 
and secure immunity while he violates the law. Where that is im- 
possible, he will engage the brightest and ablest minds in the nation 
to make a way whereby the forbidden fruit can be obtained. Thus 
the State must always be in the position of having many of the 
ablest and keenest minds devoted to the special task of outwitting 
it. At best, regulation thus becomes a war between the social or- 
ganization, the State, and a class of monopolists. 



VIII. 

THE PROBLEM OF POPULATION. 

A. THE QUESTIOX OF XU^rBERS. 

202. The Real Impediment to the Establishment of a Perfect 

Industrial State. 

BY THOMAS H. HUXLEY. 

Suppose a shipload of English colonists to form a settlement in 
such a country- as Tasmania was in the middle of the last century-. 
On landing they find themselves in the midst of a state of nature^ 
widely differing from that left behind them. They proceed to put 
an end to this state of things over the area they wish to occupy. 
They clear away the native vegetation, and introduce English vege- 
table and animal life, and English methods of cultivation. Con- 
sidered as a whole the colony is a composite unit introduced into the 
old state of nature : and. thenceforward, a competitor in the strug- 
gle for existence. Under the conditions supposed there is no doubt 
of the result, if the work of the colonists be carried out intelligently. 
On the other hand, if they are slothful, stupid, or careless, there is 
no doubt that the old state of nature will have the best of it. 

Let us now imagine that some administrative authority-, as far 
superior to men as men are to their cattle, is set over the colony. 
The administrator would, so far as possible, put a stop to the in- 
fluence of external competition by thoroughly extirpating the native 
rivals, whether man, beasts, or plants. And he would select his 
human agents with a view to his ideal of a successful colony. Xext, 
in order that no struggle for means of existence between human 
agents should weaken the efficiency of the corporate whole, he would 
make arrangem-cnts by wliich each would be provided with those 
means. In other words, selection by means of a struggle for ex- 
istence between man and man would be excluded. At the same 
time, the obstacles to the development of the full capacities of the 
colonists would be removed by the creation of artificial conditions 
of existence of a more favorable character. Protection against heat 
and cold : drainage and irrigation, as preventitives of excessive rain 
and drought : roads and canals, to overcome obstacles to locomo- 
tion: mechanical agencies to supplement the natural strength of 
men, would all be afforded. With ever\- step in this progress in 



374 READINGS IN ECONOMIC PROBLEMS 

civilization, the colonists woiild become more and more independent 
of nature. To attain his ends the administrator would avail him- 
self of the courage, industry and co-ioperative intelligence of the 
settlers ; and it is plain that the interests of the community would 
be best served by increasing the proportion of persons whO' possess 
such qualities, in other .words, by selection directed toward an ideal. 
Thus the administrator might look for the establishment of an 
earthly paradise, a true garden of Eden, in which all things should 
work together toward the well-being of the gardeners, in which 
men themselves should have been selected with a view to their 
efficiency as organs for the performance o^f the functions of a per- 
fected society. 

But this Eden would have its serpent, and a very subtle beast 
too. Man shares with the rest of the living world the mighty 
instinct of reproduction and its consequence, the tendency to multi- 
ply with great rapidity. The better the measures of the administra- 
tor achieved their object, the more completely the destructive agen- 
cies of the state of nature were defeated, the less would that multi- 
plication be checked. Thus as soon as the colonists began to mul- 
tiply, the administrator would have tO' face the tendency tO' the 
reintroduction of natural struggle into his artificial fabric, in con- 
sequence of the competition, not merely for the commodities, but 
for the means of existence. When the colony reached the limit of 
possible expansion, the surplus population must be disposed of 
somehow ; or the fierce struggle for existence must recommence 
and destroy the artificially created system. 

203 Early Views of the Value of a Large Population.* 

a) BY SIR WILUAM TEMPLE. 

The true and natural ground O'f trade and riches is the num- 
ber of people in proportion tO' the compass of the ground they 
occupy. This makes all things necessary to- life dear, and forces 
men to industry and parsimony. These customs which grow first 
from necessity become with time to be habitual to the country. And 
wherever they are so, that place must grow great in traffic and 
riches, if not disturbed by some accident or revolution, by which 
the people come either to be scattered or destroyed. When things 
are once in motion trade begets trade as fire does fire; and people 
go much where people have already gone. 

* The dates of the birth and death of those whose views are presented 
here are as follows: Temple, 1628-1699; Child, 1630-1699; Defoe, 1661-1731; 
Ferguson, 1723-1818; Stewart, 1712-1780; Young, 1741-1820. 



POPULATION AND IMMIGRATION 375 

b) BY SIR JOSIAH CHILD. 

You cry up the Dutch to be a brave people, rich and full of 
cities, that they swarm with people as bee-hives with bees ; if a 
plague come they are filled up presently and such like; yet they 
do all this by inviting all the world to come and live among them. 
You complain of Spain, because their inquisition is so high, they'll 
let nobody come and live among them, and that's the main cause 
of their weakness and poverty. Will not a multitude of people 
strengthen us as well as the want of it weaken them? Sure it will. 

c) BY DANIEL DEFOE. 

Whence is all this poverty of a country? 'Tis evident "twas 
want of trade and nothing else. Trade encourages manufacture, 
prompts invention, increases labor and pays wages. As the num- 
ber of people increase, the consumption of provisions increases. As 
the consumption of provisions increases, more lands are cultivated. 
In a word as the land is employed the people increase of course 
and the prosperity of a nation rises and falls just as trade is sup- 
ported or decayed. 'Tis by their multitude, I say, that all wheels 
of trade are set on foot, the manufacture and produce of the land 
and the sea are finished, cured and fitted for the markets abroad ; 
'tis by the largeness of their gettings that they are supported. 

d) BY ADAM EEBGUSON. 

• The number in which we should wish mankind to exist is lim- 
ited only by the extent of place for their residence and of provision 
for their subsistence and accommodation ; and it is commonly ob- 
served that the numbers of mankind in every situation do' multiply 
up to- the means of subsistence. To extend these limits is good ; to 
narrow them is evil ; but although the increase in numbers may thus 
be considered as object of desire, yet it does not follow that we 
ought to wish the species thus indefinitely multiplied. 

e) BY SIR JAMES STEUART. 

The generative faculty resembles a spring with a loaded weight, 
which always exerts itself in proportion to the diminution of resist- 
ence ; when food has remained some time without augmentation or 
diminution the spring is overpowered ; the force of it becomes less 
than nothing, inhabitants will diminish at least in proportion to the 
over charge. If on the other hand food be increased the spring 
will exert itself in proportion as the resistence diminishes : people 
will begin to be better fed ; they will multiply, and in proportion as 
they increase in numbers, the food will become scarce again. 



376 READINGS IN ECONOMIC PROBLEMS 

f) BY ARTHUR YOUNG. 

In spite of the assertions of all political writers for the last 
twenty years, who place the prosperity of a nation in the greatest 
possible population, an excessive population without a great amount 
of work and without abundant productions, is a devouring surplus 
for a state; for this excessive population does not get the benefits 
of subsistence, which, without this excess, they would partake of ; 
the amount of work is not sufficient for the number of hands ; and 
the price of work is lowered by the great competition of the labor- 
ers, from which follows indigence to those who' cannot find work. 



B. THE MALTHUSIAN THEORY OE POPULATION. 
204. The Social Crisis at the Time of Malthus. 

BY FRANCESCO S. NITTI. 

At the time of Adam Smith's death, in 1790, the French Revolu- 
tion had just burst forth, and the choice spirits of the whole of 
Europe followed it with enthusiasmi and trust. Very fortunately 
for himself, Smith did not see the days of terror and the ruin of 
the French Revolution, nor did he behold the frightful economic 
crisis which later resulted from the industrial revolution in his own 
country. In what different surroundings and under what different 
conditions Malthus conceived and published his work ! 

The French Revolution was stifled in blood, and upon the politi- 
cal horizon of Europe there already appeared the showers which 
announced the Napoleonic storms. The tyrant had been killed, 
the old privileges abolished, but the illusion had also proved false 
in a great and far-reaching way ; for, in spite of reforms, society 
had remained essentially the same. 

The life of England beheld by Malthus in his youth was not 
less saddening. Various successive seasons of scarcity had impov- 
erished British agriculture, while, influenced by the rapid develop- 
ment of industries, the population increased and the phenomenon of 
over-population systematically occurred. Imports and custom du- 
ties hindered the rapid progress of the means of subsistence and 
of exchange. The evils of war and famine found a sad counter^ 
part in the occurrence of a terrible industrial crisis, than which 
not even England has seen a sadder or a vaster. The great num- 
ber of discoveries had, in fact, originated the formation of the great 
industrial system ; and, crushed by this last, the smaller industries 



POPULATION AND IMMIGRATION 377 

were violently injured and unable to resist. Thus the old indus- 
tries died away on all sides, bringing down in their ruin thousands 
of workmen, and causing a strong feeling of misfortune to be felt 
by the whole of England. This evil state of things was the more 
deeply felt because the new ideas, spread among the educated class- 
es, augmented the subjective causes of misery. 

The poor laws became a source of evil ; far from remedying 
pauperism, they increased it. Government provisions in favour of 
the poorer classes were inopportune. 

In short, the whole administration of public relief was defec- 
tive. J\Iultiplying the relief given, and enlarging the practice of 
allowances was of no avail : it ended by causing a progressive de- 
cline in wages. Indeed, at one time, the tithe which the poor-rate 
levied upon the tax-payers in general, became nothing else than a 
species of subsidy given to manufacturers. In reality, the taxpay- 
ers were not burdened for the benefit of the poor, but of the man- 
ufacturing classes, and the tax increased so^ much that the rate of 
the wages decreased while that of the reliefs increased. Such were 
the causes which prepared and produced the pessimistic philosophy 
and economics of which Malthus was probably then the greatest 
interpreter. 

In the great disproportiate distribution of wealth originated by 
the large growing industry and the rapid technical revolution, So- 
cialism was already taking its rise. 

The chief spokesman of the new theories, William Godwin, a 
very successful agitator and a genial if not always a profound 
writer, but always most acute and daring, was placed more than any 
other in this grave contradiction. 

It is in truth very difficult to gather a broad and complete system 
from Godwin's disordered work ; what is chiefly wanting to it is 
stability O'f views. While in his celebrated book, An Inqidry Con- 
cerning Political Justice, studying the forms of property he 
distinguishes between the contran,^ systems of private property and 
of supply and demand, and declares himself favourable to this last 
system, and hence to that of common property ; nevertheless, he 
would have the great transformation to occur spontaneously, with- 
out revolution or the intervention of the legislature. The evils 
which oppress society belong in no way to the nature of thing's ; on 
the contrary, it is from human institutions that misery and injus- 
tice arise. Social ^^^ealth not only exists in sufficient quantity, but, 
if properly distributed, could afford an easy existence in exchange 
of moderate labour. Let wealth be properly distributed, and give 
mankind sufficient time for education and culture, and unaided rea- 



378 READINGS IN ECONOMIC PROBLEMS 

son will become the g-uide of human action, and there will be no 
further need of coercion and violence. In short, Godwin's ideal 
was really an anarchical one, but mild and pacific. 

Among the greatest admirers of Godwin was the father of Rob- 
ert Malthus. Not so the sou. The study of history had shown him 
that proigress, won by dint of sacrifices, was always very limited 
and always gained by main force amid resolute, insurmountable, 
unceasing obstacles. Therefore, he did not trust the views of his 
father or the philosophy of Godwin ; and it was while studying them 
that he conceived the plan of collecting the chief ideas, and in 1798 
he published his work: An Essay on the Principle of Popuiation as 
it Affects the Future Improz'enicnt of Society. 

205. The Theory of Population. 

BY THOMAS ROBERT MAI^THUS. 

In an inquiry concerning the improvement of society, the mode 
of conducting the subject which naturally presents itself, is, i, To 
investigate the causes which have hitherto impeded the progress oi 
mankind towards happiness ; and 2, To' examine the probability of 
the total or partial removal of these causes in the future. The 
principal object of this essay is to examine the effects of one great 
cause intimately united with the very nature of man. This is the 
constant tendency of all animated life tO' increase beyond the nour- 
ishment provided for it. 

Through the animal and vegetable kingdoms Nature has scat- 
tered the seeds of life abroad with the most profuse and liberal 
hand. If the germs of existence contained in the earth could freely 
develop themselves, they would fill millions of worlds in the course 
of a few thousand years. Necessity, that imperious, all-pervading' 
law of nature restrains them and man alike within prescribed 
bounds. 

The effects of nature's check on man are complicated.- Impelled 
to the increase of his species by an equally powerful instinct, rea- 
son interrupts his career, and asks him whether he may not bring 
beings into the world, for whoan he cannot provide the means of 
support. If he hear not this suggestion, the human race will be 
constantly endeavoring to increase beyond the means of subsistence. 
But as, by that law of our nature which makes food necessary to 
the life of man, population can never actually increase beyond the 
lowest nourishment capable of supporting it, a strong check on pop- 
ulation, namely, the difficulty of acquiring food, must be constantly 
in operation. This difficulty must fall somewhere, and must neces- 



POPULATION AND IMMIGRATION 



379 



sarily be severely felt in some or other of the various forms of 
misery by a large portion of mankind. This conclusion will suffi- 
ciently appear from a review of the different states oi society in 
which man has existed. But the subject will be seen in a clearer 
light, if we endeavour to ascertain what would be the natural in- 
crease in population, if left to exert itself with perfect freedom. 

Many extravagant statements have been made of the length of 
the period within which the population of a country can double. 
To be perfectly sure we are far within the truth, we will take a 
slow rate, and say that population, when unchecked, goes on doub- 
ling itself every twenty-five years, or increases in a geometrical 
ratioi. The rate according to which the productions of the earth 
may be supposed to increase, it will not be soi easy to determine. 
However, we may be perfectly certain that the ratio of their in- 
crease in a limited territory must be of a totally different nature 
from the ratio of the increase in population. A thousand millions 
are just as easy doubled every twenty-five years by the power of 
population as a thousand. But the food will by no means be ob- 
tained with the same facility. Man is confined in room. When 
acre has been added tO' acre till all the fertile land is occupied, the 
yearly increase in food must depend upon the melioration of the 
land already in possession. This is a fund, which, fromi the nature 
of all soils, instead of increasing must be gradually diminishing. 
But population, could it be supplied with food, would go- on with 
unexhausted vigor; and the increase in one period would furnish 
a power of increase in the next, and this without an}^ limit. If it 
be allowed that by the best possible policy the average produce 
could be doubled in the first twenty-five years, it will be allowing 
a greater increase than could with reason be expected. In the 
next twenty-five years it is impossible to suppose that the produce 
could be quadrupled. It would be contrary to our knowledge of the 
properties of land. 

Let us suppose that the yearly additions which might be^ made 
to the former average produce, instead of decreasing as they cer- 
tainly would do, were to remain the same ; and that the product of 
the land might be increased everv^ twenty-five years, by a quantity 
equal to what it at present produces. The most enthusiastic spec- 
ulator can not suppose a greater increase than this. Even then 
the land could not be made to increase faster than in an arithmetical 
ratio. Taking the whole earth, the human species would increase 
as the numbers i, 2, 4, 8, 16, 32, 64, 128, 256, and subsistence as 
I, 2, 3, 4, 5, 6, 7, 8, 9. In two centuries the population would be to 
the means of subsistence as 256 to 9; in three centuries as 4096 to 



38o READINGS IN ECONOMIC PROBLEMS 

13, and in twO' thousand years the difference would be almost in- 
calculable. 

In this supposition no limits whatever are placed to the produce 
of the earth. It may increase forever and be greater than any 
assignable quantity ; yet still the power of population, being in 
every period so miuch greater, the increase of the human species 
can only be kept down to the level of the means of subsistence by 
the constant operation O'f the strong law of necessity, acting as a 
check upon the greater power. 

But this ultimate check to population, the want of food, is never 
the immediate check except in cases of famine. The latter consists 
in all those customs, and all those diseases, which seem to be gen- 
erated by a scarcity of the means of subsistence ; and all those causes 
which tend permanently to weaken the human frame. The checks 
may be classed under two general heads — the preventative and the 
positive. 

The preventative check, peculiar to man, arises from his reason- 
ing faculties, which enables him to calculate distant consequences. 
He sees the distress which frequently presses upon those who have 
large families; he cannot contemplate his present possessions or 
earnings, and calculate the amount of each share, when they must 
be divided, perhaps, among seven or eight, wnthout feeling a doubt 
whether he may be able to support the offspring which probably 
will be brought into the w^orld. Other considerations occur. Will 
he lower his rank in life, and be obliged to give up in great meas- 
ure his former habits? Does any mode of employment present it- 
self by which he may reasonably hope to maintain a family? Will 
he not subject himself tO' greater difficulties and more severe labor 
than in his present state? Will he be able to give his children ade- 
quate educational advantages? Can he face the possibiHty of ex- 
posing his children to poverty or charity, b}^ his inability to provide 
for them,? These considerations prevent a large number of people 
from pursuing the dictates of nature. 

The positive checks to population are extremely various, and in- 
clude every cause, whether arising from vice or misery, which in 
any degree contributes to shorten the natural duration of human 
life. Under this head may be enumerated all unwholesomie occu- 
pations, severe labour, exposure to the seasons, extreme poverty, 
bad nursing of children, great towns, excesses of all kinds, the whole 
train of common diseases, wars, plagues, and famines. 

The theory of population is resolvable into three propositions : 

1. Population is necessarily limited by the means of subsistence. 

2. Population invariably increases where the means of subsistence 



POPULATION AND IMMIGRATION 381 

increase, unless prevented by some very pow^erful and obvious 
checks. 3. These checks which keep population on a level with the 
means of subsistence are all resolvable into- moral restraint, vice, 
and misery. 

206. A Comparison of Malthus and Darwin. 

BY J. SHIEI^D NICHOLSON. 

A comparison between Darwin and Malthus both in matter and 
method is very instructive, but it is a mistake to suppose that the 
principle of population is one case of the wider Darwinian theory. 
The truth is, though it has, I believe, been generally overlooked, 
that although Malthus suggested to Darwin the leading idea of his 
theory, as a matter of fact, he himself was definitely opposed to 
Darwin's conclusion. He admits that there may be variations with- 
in certain limits, alike in man, animals, and plants, but the limits, 
in his view, are real and insurmountable — they may be undefined 
but they cannot be indefinite. Malthus gave no countenance to 
the opinion that in mankind the struggle for existence would lead to 
the survival of the fittest, and that the ultimate product would be 
the highest civilization. On the contrary, he draws a distinction not 
only in degree, but in kind, between the intelligence and morality 
of man and of other animals, and the progress of man he ascribes 
to the conquest by his superior attributes oi those lower animal pro- 
pensities. 

The resemblance between the two writers is to be found not in 
the matter of their conclusions, but in the method of their research. 
Each started with a guiding principle, but neither, to adopt Mai-- 
thus' description of his own work, entrenched himself in an im- 
pregnable fortress of abstraction and hypothesis ; on the contrary, 
both wandered in search of facts over the large field oi experience. 
Malthus discovered and enumerated the principal causes that affect 
the actual growth of peoples ; similarly Darwin investigated the 
actual growth of species. It is a curious and suggestive fact that 
Malthus, who took a priori views of animals and plants, denied the 
theory oi Darwin, whilst Darwin, who, in respect to man's higher 
nature, was equally a priori in reality, denied the theor}^ of Malthus. 

Like all great writers, Malthus was influenced, not only by the 
speculative thought, but by the social conditions of his time. The 
work was composed during the period when the English Poor Taw 
was gradually bringing tO' maturity many evils. The governing 
principle during this period was that the people, who, in the words 
of Pitt, had enriched their country with a number of children. 



382 READINGS IN ECONOMIC PROBLEMS 

should receive relief as a matter of right and honour. Even Adam 
Smith had declared that the best sign of the prosperity of a country 
was a rapid increase of population. It must be remembered that 
during the period in question, the country was engaged in a great 
war, and a large population was looked upon as a political neces- 
sity. Accordingly, when Malthus set himself to prove that the 
Poor Laws had doue much more harm than good, and ought to be 
gradually aboJished, and when he boldly asserted that, "it is not the 
duty of a man, simply tO' propagate his' species, but to propagate 
virtue and happiness, and that if he had not a tolerably fair pros- 
pect of doing this, he is by no means called upon to have descend- 
ants," he struck straight at notions universally prevalent, and his 
teaching was branded with opprobrious epithets. Just as Darwin 
shocked traditional theologv regarding the origin, so Malthus of- 
fended it in respect of the continuance, of human species. Those 
who think that the principle of population is an obvious truism 
would do well to take note of the controversy which its enunciation 
excited, and those who imagine that Malthus ever wrote anything 
opposed to common sense morality should do his memory the jus- 
tice of reading the essay itself. No man has ever suffered so much 
from being answered by those who have never seen a line of his 
works. 

207. Malthusianism a Support of Capitalism. 

BY PIERCY RAVEN STONE. 

We have new doctrines preached to us. Men, it is now discov- 
ered grow more readily than plants. Human beings overrun the 
world with the rapidity of weeds. Hence the hopeless misery. The 
earth groans under the weight of numbers. The rich it is now dis- 
covered give bread to the poor. Labour owes its support to idle- 
ness. Those who produce everything would starve but for the as- 
sistance of those who produce nothing. The numbers of the poor 
are to be checked by all possible means: every impediment is to be 
placed in the way of their marriages, lest they should multiply too 
fast for the capital of the country. The rich, on the contrary, are 
to be encouraged, everything is to be done for their benefit. For 
though they produce nothing themselves, their capital is the cause 
of everything produced ; it gives fertility to our fields and fecundity 
to our flocks. 

These doctrines are new. It was long the established creed oi 
every statesman, that in the extent of its population consisted the 
strength, the power, and the opulence of every nation; that it was 
therefore the duty of every sovereign to increase, by all prac- 



POPULATION AND IMMIGRATION 383 

ticable means, the number of the people commdtted to his charge. 
On whatever other points statesmen and legislators might differ, 
on this they were all agreed. From Lyciirgus to Montesquieu the 
doctrine underwent no change. Marriage was everywhere held up 
as honourable ; children were considered as entitling their fathers 
to peculiar privileg'e and the mark of scorn was imprinted on the 
selfish being who remained single. Poverty gave no exception, it 
rather increased the obligation. His country gratefully received 
in children the contribution of him who had nothing else to give. 
The wealth of a nation consisted in the number and strength of 
its peasantry. Men did not dream that riches could be separated 
from numbers. By these newer doctrines pestilence and famine 
are ministers of God, executing his eternal decrees, and rescuing 
us fro'm the necessity of overwhelming wretchedness. The doctrine 
has robbed Divinity of all the charities of his nature, leaving to 
him little else than the functions of an enemy of mankind. 

The great and the rich could not be much offended at discover- 
ing that whilst their rights were augmented, they were entirely 
absolved from the performance of those actions which the less 
enlightened judgment of other times had classed amongst the most 
important and essential of their duties. To be merciful to our own 
faults, to believe our idle expenses meritoTious, to set up selfishness 
as the idol of our idolatry, and toi drive away charity, are duties not 
very repugnant to our nature. They demand no sacrifice in their 
performance. The temple of virtue will be crowned with votaries, 
if it be made to^ lead tO' the shrine of self-interest. 

Those severer morals which taught that the poor were equally 
partakers of the divine nature with the rich ; that they were equally 
fashioned in the image and likeness of God; that their industry 
being the cause of all that was produced, and the rich being in real- 
ity only pensioners on their bounty, the latter were only trustees 
for the good of society ; that their wealth was given not for their 
own enjoyment, but for its better distributioai through the different 
channels of society, were not likely long tO' maintain their hold on 
the minds of the wealthy against those sedative doctrines which 
flattered the passions, converted faults into good qualities, and made 
even conscience pander toi vices. 

It is an old and dreary system which represents our fellow- 
creatures as so many rivals and enemies, which makes as believe 
that their happiness is incompatible with our own, which builds our 
wealth on their poverty, and teaches that their numbers cannot con- 
sist with our comforts and enjoyments; which would persuade us 
to look on the world as a besieged town, where the death of our 



384 READINGS IN ECONOMIC PROBLEMS 

neighbors is hailed with secret satisfaction since it augments the 
quantity of provisions hkely to fall to our share. To consider mis- 
ery and vice as mere arrangements of the Divinity to prevent the 
inconvenience of a too great population of the world, is tO' adopt 
predestination in its worst form. In committing crimes we should 
only be executing the will of God ; in alleviating the distresses of 
others, in feeding the hungry and clothing the naked, we should be 
running counter to the decrees of Providence. 

But before we can adopt these conclusions, it behooves us to 
examine on what foundation the system is built. We must remem- 
ber that it is the common interests of all members which holds so- 
ciety together. Misery is not of God's creation; vice is not the 
minister of His wall. I shall show that the increase in numbers in 
the human species is wholly uninfluenced by human institutions. It 
is by no means so varied in its operation as Mr. Malthus has sup- 
posed ; it affords nO' ground for alarm ; it calls for no restrictive 
measures, since the increase in subsistence is entirely dependent, on 
the increase in numbers. Every man brings intO' the world the 
means of producing his own sustenance. Wherever the numbers of 
the people increase more rapidly than the means of subsistence, the 
faylt is not with Providence, but in the regulations of society. Cap- 
ital is no addition tO' the wealth of a nation ; it conduces nothing to 
the improvement of the industry ; it is merely a new distribution of 
the property of society, beneficial to some, wholly because it is in- 
jurious to others. 

208. An Early American View of Population. 

BY HENRY C. CAREY. 

The Malthusian law of population may be briefly given in the 
following words : — 

Population tends to increase in a geometrical ratio, while the 
supplies of food can increase in an arithmetical one only. The 
former is, therefore, perpetually outstripping the latter, and hence 
it is, that there is everywhere seen to arise the disease of over-pop- 
ulation, with its accompanimients, poverty, wretchedness, and death 
— a disease requiring for its remedy wars, pestilences, and famines 
on the one hand, or, on the other, the exercise of that "moral re- 
straint," which shall induce men and women to refrain from matri- 
. mony, and thus avoid the danger resulting from further addition 
to the numbers requiring to be fed. Reduced tO' distinct proposi- 
tions, the theory may now be given as follows : — 

I. Matter tends tO' take upon itself higher forms, passing from 



POPULATION AND IMMIGRATION 385 

the simple ones of inorganic life to the complex and beautiful ones 
of vegetable and animal life, and finally terminating in man. 

2. This tendency exists in a small degree as relates to the 
lower forms of life — matter tending to take upon itself the forms 
of potatoes, turnips, and cabbages, herrings, and oysters, in an 
arithmetical ratio only. 

3. When, however, we reach the highest of all the forms of 
which matter is capable, we find the tendency to assume that form 
augmenting in a geometrical ratio ; as a consequence of which, while 
man tends to increase as i, 2, 4, 8, 16, and 32 — the potatoes and 
cabbages, the peas and turnips, the herrings and the oysters, in- 
crease as I, 2, 3, and 4 only — producing the result that the highest 
form is perpetually outstripping the lower ones, and causing the 
disease of over-population. 

Were such things asserted in regard to anything else than man, 
they would be deemed in the highest degree absurd, and those by 
w^hom they were asserted would be required to explain why it was 
that an universal law had here been set aside. Everywhere else, 
the increase in number is in the inverse ratio of development. The 
little coral insects are required, in quantity innumerable, to build 
up islands, for animals and men that count by thousands, or by 
millions. Of the cUo horealis, thousands are required to furnish a 
mouthful for the mighty whale. The progeny of a pair of carp 
would, in a single decade, as we are told, amount to millions. The 
countless ferns prepare the soil for the single oak ; and the progeny 
of a pair of rabbits would, in twenty years, count by millions — 
whereas, that of a pair of elephants, would -not amount to dozens. 
When, however, we reach the highest condition of which matter is 
capable, we learn the existence of a new and greater law, in virtue 
of which man increases in a geometrical ratio', while the increase 
of herrings, rabbits, oysters, potatoes, turnips, and all other com- 
modities required for his use, is limited tO' the arithmetical one ! 
Such is the extraordinary law propounded by ]\Ir. Malthus, as ex- 
isting in reference to the only being on whom has been impressed 
the desire for association, as necessary for compliance with the sole 
condition of his existence ; the only one, to whom has been given 
an infinite variety of capacities fitting him for association with his 
fellow men, and requiring it for his development ; and the only 
one, too, that — having been gifted with the power to distinguish 
right from wrong, and thus been made responsible for his actions — • 
might with reason have required, that he should be exempt from 
any law requiring him to make his election between abstinence 



386 READINGS IN ECONOMIC PROBLEMS 

from that association which, of all others, tends most to the improve- 
mient of his head and heart, on one hand, and starvation on the 
other. Such, however, according to the generally received doctrines 
of modern political economy, is the law of population instituted by. 
an all-wise, all-powerful, and all benevolent Creator, in reference 
to the being made in his "own likeness, and gifted with power to 
control and direct all the forces of nature to his use — ^and, strange 
as it appears, no proposition ever offered for consideration has exer- 
cised, or is now exercising, upon the fortunes of the human race a 
greater amount of influence. That such should have been the case 
has, in part, resulted from the fact that it has been buttressed up 
by another one, in virtue of which man is supposed everywhere to 
have commenced the work of cultivation on rich soils — necessarily 
those of swamps and river bottoms — with large return to labor ; and 
to have found himself compelled, with the growth of population 
and of wealth, to have recourse to poorer ones, with constant de- 
cline in the return to labor — a theory that, if true, would fully 
establish the correctness of that of Mr. Malthus. 

209. Malthus versus the Malthusians, 

BY L. T. HOBHOUSE. 

The appearance of the biological theory of progress, of Avhich 
we have been hearing much of late, was announced by the terrible 
douche of coild water thrown by Malthus on the speculative optim- 
ism of the eighteenth century. The generation preceding the French 
Revolution was a time of buoyant and sanguine outlook. There 
floated before men the idea of an age of reason when men should 
throw off the incubus of the past and resume a life in accordance 
with nature in a social order founded on a rational consideration 
of natural rights. Nature both in the politics and the economics 
of the time assumes a half personal and wholly benevolent character 
while human restrictions, human conventions, play the part of the 
villain in the piece. At this point Malthus intervened by calling 
attention to a "natural" law of great significance. This was the 
law that human beings multiplied in a geometrical ratio; that it 
was only by the checks of famine, pestilence, and war that they 
were prevented from overspreading the earth, and that, to cut the 
matter short, whatever the available means of subsistence, mankind 
would always, in the absence of prudential checks, multiply up to 
the limit at which those means became inadequate. True, the means 
of subsistence might be extended. New countries might be opened 



POPULATION AND IMMIGRATION 387 

up. New sources of food supply might be discovered. Every such 
extension, the Malthusian argued, would only redouble the rate of 
multiplication. Checks would cease, men and women would marry 
earlier ; Y&ry soon population would again be pressing on the means 
of subsistence. The advance in civilization told in the same direc- 
tion. Population was increasing, must increase. It could be held 
in check only by the one great barrier of the subsistence limit 
against which the fringe of advancing population must foi'ever beat 
in misery. There could be no solution oi the social question ; for 
in the nature of things there must be a line where the surf of the 
advancing tide breaks upon the shore, and that shore was death 
from insufficiency of nourishment. You observe that in summariz- 
ing the argument I speak partly of Malthus, partly of the Malthus- 
ians, Malthus himself, particularly in his second edition, laid stress 
on the prudential checks. He cannot fairly be accused of foster- 
ing the pessimistic views often fastened upon him. But for many 
a long year after he wrote, the efficacy of the prudential checks ap- 
peared to be very slight. It was his first edition that was generally 
absorbed and that profoundly influenced social thought for nearly 
a century. It was not till the seventies that there came into opera- 
tion that general fall in the birth-rate, which has justified Malthus 
against the Malthusians, has put the calculations of the future 
growth of population on a radically difl^erent basis, and has brought 
about among other things a complete reconstruction of the biologi- 
cal argument against progress. I venture to think we may draw a 
lesson from the fate of Malthusianismi. Mathematical arguments 
drawn from the assumption that human beings proceed with the 
statistical regularity of a flock of sheep are exceedingly difficult 
to refute in detail, and yet they rest on an insecure foundation. 
Man is not merely an animal. He is a rational being. The Mal- 
thusian theory was one cause of the defeat of its own prophecies. 
It was the belief that population was growing too fast that operated 
indirectly to check it. Those who fear that population is now 
growing too slowly, may take some comifoTt from the reflection. 
We are not hastily to assume inevitable tendencies in human socie- 
ty, because the moment society is aware of its tendencies a new 
fact is introduced. Man, unlike other animals, is moved by the 
knowledge of ends, and can and does correct the tendencies whose 
results he sees tO' be disastrous. The alarmist talk ' of race suicide 
may serve its purpose if only by admonishing us of the fate of a 
theory based on what appears to be a most convincing biological 
calculation. 



388 READINGS IN ECONOMIC PROBLEMS 

C. THE RELATION OF IMMIGRATION TO THE POPU- 
LATION QUESTION. 

210. The Falling Birth-Rate. 

BY EDWARD AI.S WORTH ROSS. 

A century ago Malthus startled the world by demonstrating that 
our race naturally multiplies faster than it can increase its food 
supply, with the result that population tends ever tO' press painfully 
upon the means of subsistence. Soi long' as mankind reproduces 
freely, numbers can be adjusted tO' resources only by the grinding 
of destructive agencies, such as war, famine, poverty and disease. 
To be sure, this ghastly train of ills may be escaped if only people 
will prudently postpone marriage. Since, however, late marriage 
calls for the exercise of more foresight and self-control than can 
be looked for in the masses, Malthus painted the future of humanity 
with a somberness that gave political economy its early nickname 
of "the dismal science." 

Malthus is not in the least "refuted" by the fact that, during his 
century, the inhabitants of Europe leaped in number from one hun- 
dred and eighty-seven millions to four hundred millions, with no 
increase but rather diminution of misery. It is true, unprecedented 
successes in augmenting the food supply have staved off the over- 
population danger. Within a life time, not only have the arts of 
food raising made giant strides, but, at the world's rim, great virgin 
tracts have been brought under the plow, while steam hurries to 
the larders of the Old World their surplus produce. But such a 
bounty of the gods is not rashly to be capitalized. While there is 
no limit to be set to the progress of scientific agriculture, no one 
can show where our century is to find its Mississippi Valley, Argen- 
tina, Canada, or New Zealand, to fill with herds or farms. The 
vaunted plenty of our time adjourns but does not dispel the haunt- 
ing vision of a starving race on a crowded planet. 

Nevertheless, the clouds that hung low about the future are 
breaking. The terrible Malthus failed to anticipate certain influ- 
ences which in some places have already so far checked multiplica- 
tion as to ameliorate the lot of even the lower and broader social 
layers. The sagging of the national birth-rate made its first ap- 
pearance about fifty years ago in France, thereby giving the other 
peoples a chance to thank God they were not as these decadent 
French. But the thing has become so general that today no people 
dares to point the finge'r of scorn. In 1878, the fall of the birth- 
rate began in England. During the eighties, it invaded Belgium, 



POPULATION AND IMMIGRATION 389 

Holland, and Switzerland. In 1889 it seized with great virulence 
upon Australia. Just before the close of the century Finland, Italy, 
and Hungary fell into line. In Germany and Austria it is only 
within four or five years that the economists have begun to discuss 
"our diminishing fecundity." In all Christendom, only Russia, the 
Balkan states and French Canada show the old-fashioned birth-rates 
of forty, fifty, or even fifty-five, per thousand. The tendency in the 
United States is best revealed in the diminishing number of children 
under five years to each thousand women of child-bearing age. The 
decline from i860 to 1890 is 24 per cent. 

Owing tO' the fact that the death rate has been falling even 
faster than the birth rate, there is, sO' far, no slackening in the. 
growth of numbers. Indeed, part of the fall in the birth rate merely 
reflects the increasing proportion of aged. 

The forces reducing the death-rate are by no means the same 
as those cutting down the birth-rate, nor have they the same sphere 
of operation. Deaths are fewer because of advances in medicine, 
better medical education, public hospitals, pure water supply, milk 
inspection, housing reformi and sanitation. Births are rarer owing 
to enlightenment, the ascent of women, and individualistic democ- 
racy. The former may be introduced quickly, from above. The 
latter await the slow action of the school, the press, the ballot, the 
loosening of custo-m. 

An abrupt fall in the birth-rate of froim 10 to 20 per cent among 
the four hundred million bearers of the Occidental torch is a phe- 
nomenon so vast and so pregnant as to excite the liveliest specu- 
lation. Some lay it to physiological sterility produced by alcohol, 
city life and over-civilization. There are, indeed, in some quarters, 
notably in New England, evidences of a decline in female fertility ; 
but, on the whole, the lower birth-rate reflects the smaller size of 
families rather than the greater frequency of childless couples. 

Others insist that vice, club-life, the comfortable celibacy of 
cities, and the access of women to the occupations are turning peo- 
ple away from wedlock. It is true that the proportion of single 
women is increasing with us. Still, few peoples are sO' much mar- 
ried as Americans, and, for all that, their birth-rate has fallen fast 
and fallen far. Michigan, which is about as addicted to the mar- 
ried state as any white community in the world, has only two-thirds 
the fecundity of England and half that O'f Hungary. 

Perhaps the master force of our time is democracy. The bar- 
riers of caste are down so that more and more a man's social stand- 
ing depends upon himself. The lists oi life are open to all, and the 
passion to "succeed" grows with the value of the prizes tO' be won. 



390 



RBADINGS IN ECONOMIC PROBLEMS 



Never before did so many common people strain to reach a higher 
rung in the social ladder. But prudence bids these eager climbers 
avoid whatever will impede one's ascent of imperil one's footing. 
Children are incumbrances, so the ambitious dread the handicap of 
an early marriage and a large family. Even the unselfish, whose 
aim is to assure their children a social position equal to or superior 
to their own, will see to it that there are not more children than 
they can properly equip. 

The effect of democracy is reinforced by the break-up of custom. 
As fixed class distinctions fade out, people cease to be guided by the 
traditional standard of comfort. It is nO' longer enough to live as 
. father and mother lived. Wants and tastes, once confined to the 
social elect, spread resistlessly downward and infect the masses. 
Here the decencies, there the comforts, yonder the vanities of life 
compete with the possible child and bar it from existence. 

The great movement that has burst the fetters on woman's mind, 
and opened to her so many careers, exalts her in the marriage part- 
nership and causes the heavy price of motherhood to be more con- 
sidered by her husband as well as by herself. 

However we account for the fall in the birth-rate, there, is no 
question as to its consequences. The decline registers itself in a 
rising plane of comfort, a growth of small savings, and a wider 
difTusion of ownership. Owing tO' the better care enjoyed by the 
aged when they do not have to compete for attention with an over- 
large brood of wailing infants, there is a striking increase in lon- 
gevity. A greater proportion of lives are rounded out to the Psalm- 
ist's term. There is also a wonderful saving of life among infants, 
for often prolificacy does nothing but fill the churchyards with wee 
mounds. When we consider that in 1790 there were in this coun- 
try just twice as many children under 16 toi adults over 20 as there 
are today we understand why the law limits child labor and insists 
on keeping children in school. 

But the supreme service of forethoughted parenthood is that it 
bids fair to deliver us from the overpopulation horror, which was 
becoming more imminent with every stride in medicine or public 
hygiene. Most of the Western peoples have now an excess of births 
over deaths of one per cent a year. If even a third of this increase 
should find a footing over sea, then home expansion would still be 
such that, at a future date no more remote from us than the found- 
ing of Jamestown, Europe would groan under a population of three 
billions, while the United States of that day, with twice as many 
people as Europe now has, would be tO' China what China is to the 
present United States. Besides its attendant miser)'' and degrada- 



POPULATION AND IMMIGRATION 



391 



tion, population pressure sharpens every form of struggle among 
men, — competition, class strife, and war — and the dream of a moral 
redemption of our race would vanish into thin air if the enlightened 
peoples had failed to meet the crisis created by the reduction of 
mortality. 

Once it seemed as if man's propensity to multiply foredoomed 
him to live ever in the presence of vast immediate woe. However 
smiling the gardens of Daphne they had always toi slope down into 
a huge malodo'rous quagmire of wretchedness. The wheel of Ixion, 
the cup of Tantalus, symbolized humanity striving ever by labor 
and ingenuity to relieve itsel'f of a painful burden, only tO' have 
that burden inexorably rolled back upon it by its own fatal fecun- 
dity. 

Now that cheap travel stirs the social deeps and far-beckoning 
opportunity fills the steerages, immigration becomes ever more 
serious to the people that hopes to rid itself at least of slums, 
''masses" and "submerged." What is the good of practising pru- 
dence in the family if hung'ry strangers may crowd in and occupy 
at the banquet table of life the places reserved for its children? 
Shall it, in order to relieve the teeming lands of their unemployed, 
abide in the pit of wolfish competition and renounce the fair pros- 
pect of a growth in suavity, comfort, and refinement? If not. then 
the low-pressure society must not only slam its doors upon the in- 
draught, but must double-lock them with forts and ironi-clads, lest 
they be burst open by assault from some quarter where "cannon 
food" is cheap. 

The rush of developments makes it certain that the vision of a 
globe "lapt in universal law" is premature. If the seers of the mid- 
century who looked for the speedy triumph of free trade had read 
their Malthus aright, they might have anticipated the tariff barriers 
that have risen on all hands within the last thirty years. So, today, 
one needs no prophet's mantle to^ foresee that presently the world 
will be cut up with immigration barriers which will never be leveled 
tmtil the intelligent accommodation of numbers to^ resources has 
greatly equalized population pressure all over the globe. The French 
resent the million and a third aliens that have been squeezed into 
hollow and prosperous France by pressure in the neighbor lands. 
The English restrict immigration from the Continent. The Gennans 
feel the thrust from the overstocked Slavic areas. The United 
States, Canada, Australia and South Africa are barring out the 
Asiatic. Dams ag'ainst the color races, with spillways of course for 
students, merchants, and travelers, will presently enclose the white 
man's world. Within this area minor dams will protect the hig'h 



392 READINGS IN ECONOMIC PROBLEMS 

wages of the less prolific peoples against the surplus labor of the 
more prolific. 

Assuredly, every small-family nation will try to raise such a 
dam and every big-family nation will try to break it down. The 
outlook for peace and disarmament is, therefore, far from bright. 
One needs but compare the population-pressures in France, Ger- 
many, Russia and Japan to realize that, even today, the real enemy 
of the dove of peace is not the eagle of pride or the vulture of greed 
but the stork ! 

211. The Immigrant Invasion. 

BY P"KANK JULIAN WARNE. 

At the time of the appearance of the comet in 1910 there was in 
progress the most remarkable and in many ways the most wonder- 
ful invasion of one country by peoples of foreign countries that the 
world had ever seen. In the very month of May, when the comet's 
appearance in the heavens was being heralded in the newspapers, 
as many as one hundred and fifty thousand representatives of differ- 
ent races and countries of the world were entering the immigrant 
ports of the United States. They were equal to one hundred and 
fifty full regiments of one thousand each ; they were double the 
entire fighting strength of the United States Army. More than one 
million people from all the countries on the globe were that year 
passing in a seemingly never-ending stream into the United States. 

They came from the British and the Spanish Americas, from^ 
Europe and from Africa, from Asia and from India, from the is- 
lands of the Pacific and the islands of the Atlantic. From the 
United Kingdom and the Russian Empire, from the Scandinavian 
countries and the Netherlands, from, the German Empire and the 
Dual Kingdom' of Austria-Hungary, from Turkey in Europe and 
Turkey in Asia, from, Italy and China and Japan, they came. There 
was not a single geographical or politically organized area of im- 
portance from which they did not come. England, Ireland, Scot- 
land, Wales, Norway, Sweden, D'enmark, Holland, Belgium, Swit- 
zerland, France, Spain, Portugal, Roumania, Greece, Armenia, Per- 
sia, Syria, Sicily and Sardinia, the Cape Verde and Azores Islands, 
the Canary and Balearic Islands, British Honduras, Tasmania, and 
New Zealand, the Philippines, Hawaii, the East and the West In- 
dies, Cuba, Canada, Mexico-, and South and Central American coun- 
tries — each and all and more were represented. 

The sources of this stream of immigration are four great stocks 
of the human race — the Aryan, the Semitic, the Sinitic, and the 
Sibiric. From the homes of these, as they have scattered them- 



POPULATION AND IMMIGRATION 393 

selves among the 'Teutonic, Celtic, Slavonic, Lettic, Italic, Hellenic, 
Illyric, Indo-Iranic, Chaldean, Chinese, Japanese, Finnic, and Tar- 
taric groups, this streanii is pouring. The peoples composing it are 
Scandinavians, Dutch, Flemish, Germans, English ; Irish, Welsh, 
Scotch, Bohemians, Dalmatians, Moravians, Croatians, Poles, Slov- 
enians, Bulgarians, Russians, Servians, Ruthenians, Montenegrins, 
Bosnians, Herzegovinians, Slovaks ; Letts and Lithuanians ; French, 
Italians, Portuguese, Roumanians, and Spaniards ; Greeks ; Alban- 
ians ; Armenians, Persians, and Gypsies ; Hebrews and Syrians ; 
Chinese ; Japanese and Koreans ; Finns and Magyars ; and Turks. 
Besides, we have coming to us Berbers and Arabs from northern 
Africa, Bretons from western France, Esthonians from western 
Russia, Esquimaux from western Alaska, Spanish Americans from 
South America. And not even all these exhaust the miultitudinous 
sources contributing to our foreign-born population. 

Unlike the invasions of other centuries and of other countries, 
the present-day immigration to the United States is not by organized 
armies coming to conquer by the sword. It is made up of detached 
individuals, or at most, of family or racial groups, afoot, the sword 
not only sheathed but also^ entirely discarded by those who have 
no idea of battling with arms for that which they come to seek. 
They do not come as armed horsemen, with their herds of cattle 
and skin-canopied wagons. Nor do they present themselves at our 
doors in "great red ships," with the ensign of the rover hanging 
from the topmast, and clad in chain-mail shirts and with helmets. 

More than twenty-eight million have entered the United States 
from all parts of the world during the ninety years since 1820! In 
the course of the nineteenth centurs^, and the first decade of the 
twentieth century, there came more than five ixLillion from Germany, 
four million from Ireland, more than three million from each of 
Austria-Hungary, and Italy, three million from England, Scotland, 
and Wales; nearly two and one-half million from Russia, nearly 
two million from Norway, Denmark, and Sweden ; and about five 
hundred thousand from France. 

More than twenty-five million immigrants came within the sixty 
years since 1850 ; and more than nineteen million cairte within the 
last thirty years. The ten years ending with 1910 gave us a total 
immigration exceeding 8,795,000, nearly five million of those arriv- 
ing within the past five years. In the single year 1910 the number 
of arrivals exceeded one million by 41,000; in the twelve months 
three years before they had reached 1,285,000, this being the largest 
single yearly inflow of foreign born in the history of the country. 

Taking the average for the past ten years, we find that there 



394 READINGS IN ECONOMIC PROBLEMS 

came annually more than eight hundred and seventy-nine thousand 
immigrants ; for every month more than seventy-three thousand ; 
for every day, Sundays and holidays included, two thousand four 
hundred and forty, and for every time the clock struck the hour, 
day and night, one hundred persons born in some foreign coimtrv 
landed on the shores of the United States. 

Truly a wonderfiil invasion ! A stupendous army ! An army 
that has been marching continually all these years — an army whose 
ranks, although chang'ing racially, have not been depleted but have 
steadily and at times alarmingly increased in numbers as the decades 
have gone by. Here is a phenomenon before which we must stand 
in awe and amazement when contemplating its consequences to the 
human race! 

Think you that any such numbers invaded the Romian world 
when the Huns poured in from, the East? Was Attila's army one- 
half, even one-tenth, as large when it overran Gaul and Italy? Did 
the Saxons in the sixth century invade England in any such num- 
bers? Or, did William the Conqueror lead any such army in the 
Norman invasion of England in the eleventh century? And yet, 
upon the peoples of those countries the mark of the invader is seen 
to this day. Think you that America alone will escape the conse- 
quences ? 

Let us look at the volume of this invasion from another angle. 
There were in the United States in 1910 more than 13,500,000 per- 
sons who had been born in some foreign country. That is, one out 
of every seven of our population came here, not through having 
been bo^rn here, but through immigration. The largest contribu- 
tion was from Germany, the next largest from Russia ; then came 
Ireland and Italy in a close race for third place, the number of the 
former exceeding those from Italy by less than ten thousand. Aus- 
tria, including Bohemia and a part of what formerly was Poland, 
held fifth place; Canada was in sixth and England in seventh place, 
Sweden in eighth, Hungary in ninth, and Norway in tenth. 

These ten countries contributed more than 11,600,000, of the 
13,500,000 or all but 1,900,000 of our foreign born. Their propor- 
tion of the total was about 86 per cent. The other countries or geo- 
graphical and political divisions represented in the foreign-born 
population of the United States in 1910 were Scotland, Wales, Den- 
mark, Holland, Belgium, Luxemburg, Switzerland, Portugal, Spain, 
France, Finland, Roumania, Bulgaria, Servia, MontenegrO', Turkey, 
Greece, Newfoundland, Cuba, West Indies, Mexico, Central Amer- 
ica, South America, Japan, China, India, Asia, Africa, Australia, 
Atlantic Islands, Pacific Islands, and other countries hot specified. 



POPULATION AND IMMIGRATION 



395 



Religiously they are believers in Roman and Greek Catholicism, 
Protestantism in its manifold forms and variations, Mohammedan- 
ism, Armenianism, Buddhism, Confucianism, Judaism, Shamanism, 
Islamism, Shintoism, and hundreds of diversified sects, some with 
such strange names as Chiah, Sunni, Parsee, Nestorian, Maronite, 
Druse, Osmanlis, Laotse, and so. on. 

Linguistically they are German, Dutch, Scandinavian, including 
Danish, Norwegian, and Swedish, Flemish, English, Gaelic, Cym- 
ric, Slavic, including Russian, Serbo-Croatian, Polish, and Bohe- 
mian; French, Italian, Spanish, Roumianian, Portuguese, Rheto- 
Roman, Greek, Albanian, Lithuanian, Lettic, Armenian, Persian, 
Yiddish, Semitic, Turkish, Finnish, Magyar, Chinese, Japanese, 
Korean, Mexican, Spanish American, and other groups distinguish- 
ed by the language they speak. Among these are such strange and 
unfamiliar dialects as Friesian, Thuringian, Franconian, Swabian, 
Alsatian, Wallon, Gascon, Languedocian,. Rhodanian, Catalan, Gal- 
ego, Friulan, Gegish, Toskish, Pamir, Caspian, Syriac, Aramaic, 
Shkipetar, and so on. 

Some conception of the significance of the numerical strength 
of the foreign born in the United States is gained by means of a 
few simple comparisons. They number over three and one-half 
millions more than all the negro population of the entire country. 
They equal more than twice the total population, and nearly thret 
times that of the native, of the six New England States ; they would 
populate the seven states of Minnesota, Iowa, Missouri, the two 
Dakotas, Nebraska, and Kansas, with their present density, and still 
have an extra 1,880,000; they supply a population 1,300,000 in ex- 
cess of the total found today in the South Atlantic division, includ- 
ing, besides the District of Columbia, also Delaware, Maryland, the 
two Virginias, the two Carolinas, Georgia, and Florida. 

Considering the native population only, which includes also the 
children born here of foreign-born parents, our total foreign born 
equals all the natives in the twenty-two states of Maine, New Hamp- 
shire, Vermont, Massachusetts, Rhode Island, Connecticut, Dela- 
ware, Florida, the two Dakotas, Kansas, Montana, Idaho, Wyom- 
ing, Colorado, New Mexico, Arizona, Utah, Nevada, California, 
Oregon, and Washington. 

212. Immigration in a Single Year. 

BY V. A. OGG. 

It is not easy to conceive what our immigration has come to be. 
The figures are too stupendous to be grasped by the mind. Let one 
who has sat in the magnificent Stadium at Cambridge, as one of the 



396 READINGS IN ECONOMIC PROBLEMS 

40jO00 spectators at a Harvard- Yale football game, reflect that if 
the immigrants entering our ports during the fiscal year 1906 were 
brought together, they would make a throng twenty-five and a half 
times as large as that which crowds every available foot of space 
around the great oval. Let him consider that the number admitted 
in this twelvemonth from Norway and vSweden alone would more 
than fill the Stadium ; that the number from Germany would do 
the same; that the influx from Great Britain would fill it two and 
one-half times. That from Russia would fill it more than five 
times ; that from Austria-Hungary would fill it more than six times ; 
and the contributions from Italy would do it seven times with 
people to spare. Let himi further call to^ mind that, on the average, 
the Stadium could be packed with the aliens who are landed at Ellis 
Island every seventeen days throughout the year. 

Then* let him consider that the total number of immigrants 
admitted in 1906 would nearly serve to populate either the city of 
Philadelphia, or the cities of Boston and Baltimore combined; that, 
in fact it would people all Maryland, or all Nebraska, or the whole 
region occupied by Arizona, New Mexico, Utah, Idaho, Wyoming, 
and Montana. These six states and territories have an aggregate 
area of 649,320 square miles, which is nearly 18 per cent of the 
total area of the United States. 



D. THE CAUSES OF IMMIGRATION. 
213. The General Causes of Immigration. 

BY P. I''. HALL. 

History from one standpoint, may be considered the story of 
race migration and its effects. In general emigration has always 
taken a westerly direction. The cause of migration for the most 
part is the overgrowth of population. This creates a need for fur- 
ther sustenance, more space, and new opportunities ; and the race 
either moves en masse, or part splits off. If peaceful expansion be 
difficult the result is either race-suicide or war. A distinction is to 
be made between the migration of tribes by means of conquest and 
the peaceful emigration of individual units. Religions freedom 
and the chance to establish a new and lofty type of commonwealth 
have induced men to emigrate; but most of the recent immigration 
has been caused by the allurements of promised wealth and ma- 
terial comfort. 

There is no doubt that the chief influence affecting immigration 



POPULATION AND IMMIGRATION 397 

in recent times is the prosperity of the courLtr}^ This is evidenced 
by the marked relationship between co'mmercial and industrial ac- 
tivity in the United States and the volume of immigration. The 
latter has followed upon the former, and has usually acquired a 
certain momentum which has caused it tO' continue for a time after 
the demand for labor here has been diminished. The commercial 
activity also makes the coming of the immigrant possible. From 
40 to 50 per cent of those who arrive have their passage prepaid 
by friends in this countr}^, and fromi 10 to 15 per cent miore buy 
their tickets abroad with money sent from the United States. This 
must come from the savings of immigrants in this country. It is 
noteworthy that in times of depression it is in skilled immigrants 
that the decrease takes place. This is due in part to the better 
knowledge of trade conditions on the part of these men ; in part, 
to the closing of mills and factories which employ skilled labor. 

In the early settlement of the country, religious and political per- 
secution had no small part in promoting immigration. But at the 
present time comparatively few instances oi persecution take place. 
The chief exceptions are the Armenians coming from Turkey, and 
the Jews fleeing from Russia to avoid oppressive legislation. But 
even in the case of the Jews it is probable that the fear of perse- 
cution and generally unsatisfactory conditions are far more potent 
than actual persecution. 

It is obvious that the cost and the degree of hardship involved 
in coming tO' this country must be an important factor in determin- 
ing the volume of immigration at any particular time. The change 
which has come over conditions of immigration in this respect are 
well described by AValker: "Fifty years ago there was a presump- 
tion that the average immigrant was among the most enterprising, 
thifty, and alert of the community from which he came. It re- 
quired no small energy, prudence and foresight to conduct the in- 
quiries relating tO' his migration, to accumulate the necessary means, 
and to find his way across the Atlantic. Today the presumption is 
completely reversed. So thoroughly has the continent of Europe 
been crossed by railways, sO' effectively has the business of emi- 
gration been exploited, soi much have the rates of railroad fare 
and ocean passage been reduced, that it is now among the least 
thrifty of an European community that the emigration agent finds 
his best recruiting ground. The care and pains required have been 
reduced to a minimum. The intending emigrants are looked after 
from the moment they are locked into the cars in their native vil- 
lage until they stretch themselves on the floors of the buildings on 
Ellis Island. Illustrations of the ease and facility with which the 



398 READINGS IN ECONOMIC PROBLEMS 

Pipe Ivine Immigration is now carried on might be given in pro- 
fusion." 

There are many other causes for immigration. One of the 
most important causes is the protective tariff. The tariff has the 
effect not only of developing certain industries in this country but 
of shutting our foreign goods from our market in these industries. 
It creates a demand for certain kinds of labor at the same time 
it destroys the demand for certain sorts of foreign goods. The 
moment you make the tariff high and the rate of wages high in a 
particular industry, the goods will be shut out and the producers 
of the goods will coine in. 

Mention may also be made of the influence of new machinery 
on immigration. Today the steam shovel and excavator, the con- 
crete mixing machine, and the construction railway accomplish 
more with a few men than could be done with thousands fifty years 
ago. Electrical coal-cutting machinery is producing the same result 
in the mines. Machinery has chiefly diminished the need for skilled 
labor. As tO' skilled labor it has been noted above that there is 
an over-supply in periods of depression. Whenever there is a 
large immigration toi the United States of unskilled labor, skilled 
labor hesitates to enter into a possible competition with it, and 
either stays at home or emigrates to some other country. A cor- 
ollary from this principle is that freedom of immigration does not 
necessarity increase the volume, though it may change the quality, 
and conversely, a, careful selection may stimulate the emigration 
of the selected classes. 

214. The Demand for White Men. 

The Congressional Commission that spent the summer in Europe 
(1907), investigating the emiigration thence tO' the United States, 
has called attention to facts that show the most interesting con- 
clusion — ^that there are not enough white men in the world. Parts 
of the United States still welcome all hale and industrious new- 
comers, but mo'st of the European governments are lamenting the 
departure of their subjects, some are taking vigorous micans to 
prevent more from leaving, and several are even trying to turn 
. the tide back toward Europe. 

In the countries that maintain large armies, objection is made 
to the departure of men who' would do military service. But there 
is a sounder economic reason than that for discouraging emigra- 
tion. Laborers are becoming scarce in parts of Europe, especially 
farm laborers. In a word, white men who can and will work are 



POPULATION AND IMMIGRATION 399 

needed everywhere. Except the jungles of the great cities, there 
are few parts of the white man's world that are overcrowded. 

The reasons for the continued flow to the United States are the 
obvious reasons of higher wages, cheaper lands, the encouragement 
of kinspeople and friends who have previously come here, and 
especially the activity of the steamship lines in seeking emigrant 
traffic. Most European countries have laws forbidding the solici- 
tation of emigrants; but, in spite of these laws, the trans- Atlantic 
lines have a thoroughly organized system of drumming them up. 
The westward migration to our continent, which is the largest 
movement of population in the history of the human race, will go 
on for many years, till there will be parts of 'Europe that will need 
immigrants more than we shall need them. 

215. The Slovaks of Hungary. 

BY UNITED STATES CONSUIv STERNE. 

None of the Slovak emigrants are paupers, neither is there any 
danger under reasonable circumstances that they may become such 
in America; for, unlike the Gypsies O'f Hungary, the Slovaks are 
not born beggars ; to the contrar}^, they are always willing to work, 
and all the harder if by doing so their object may be reached sooner. 
Many of them are strictly day labourers and never possessed prop- 
erty beyond a little house or hut and an acre or two of the sterile 
land of their section. 

Their manner of living' is the very plainest ; their homes are 
often nothing but scanty huts, of one room, wherein the whole 
family lives and sleeps promiscuously. The furniture and outfit is 
very primitive, mostly home-made, and has to last for generations. 
The sam^e can be said of their clothing, "biled shirts" being quite 
an unusual luxury with the men.' The body clothes of the latter 
are made of coarse linen, their summer clothing of the same ma- 
terial, only coarser, and in winter their clothing consists of suits 
made from a coarse and thick woolen felting, in the natural colour 
of the wool ; an everlasting cap O'f sheepskin and a pair of sandals 
about complete an outfit which has been in vogue with them 
for generations and which may be an heirloom, since the style hardly 
ever changes. An important part of their outfit is the roomy and 
long mantle without sleeves, made up from half a dozen sheepskins 
which are tanned, the wool being left on ; these "overalls" are ever 
with them, and, as the season may demand, are worn either with the 
wool on the in- or out-side, and when the men are away from home 
these mantles form their complete bed. What these patriarchal 



400 READINGS IN ECONOMIC PROBLEMS 

cloaks may lack in style is generally made up for by some gaudy em- 
broidery or even painting on the leather side of it. 

I do not wish to be unjust to these people, but from all I can 
learn their demand for water is but very limited for the use of 
the outer body as well as the inner. At home their diet consists 
principally of milk, potatoes, corn and rye bread, coffee and the 
meats being reserved luxuries of the wealthier ior Sunday or holi- 
days. While labouring in cities there is added to the above, if 
such can be done cheaply or gratis, the remnants or offal from the 
restaurant, or if times are especially "flush" with them, fresh meat 
is. bought from the butcher in the shape of the lungs, liver, or other 
unpopular but cheap portions of the beef. Their preferred drink 
is a sort of brandy made from potatoes or prunes, the latter called 
"slivovitz," and since the presence of the Slovaks in America this 
brandy has become an article of export from here to the United 
States. 

In all, it will be seen that the tastes of those people are any- 
thing but refined, are low, in fact, and the only thing which may 
be said in their excuse is their ever present object to economize 
for the sake of their families. With the same stated object, they 
are, when employed en masse in the cities, not very choice as to the 
quantity or quality of their bed- fellows. Thus as many of them 
as can, men and women alike, will pack themselves into a room or 
cellar over night, and without the least regard to- cleanliness or 
comfort. Though at all tiroes practising the closest economy, they 
will when away even strain a point so^ that their object may be 
attained sooner. At such time they can be said to compete with the 
Chinese in the most penurious practices of economy ; and were it 
not for their love of strong drink they could fairly be called the 
most frugal people living as far as the demands of the body go. 

They will work similarly cheap as the Chinese, and will inter- 
fere with a civilized labourer's earning a "white" labourer's wages. 
Like the Chinese, again, they are very exclusive people, and though 
American institutions may go a great ways towards removing this 
defect, it will usually require generations to make them enlightened 
citizens, where emigrants of other nations only need a few years. 
Another main objection to them is that, like the Chinese, they do 
not intend to remain in our country, not even as long as the latter, 
though like some of these, also, an occasional Slovak may "stick." 
But to show how sincere and strong their intention is to return 
home when they emigrate, I will state what I have from very good 
authority, namely, that some of the better-to-do' families give their 
daughters in marriage to men upon the special condition, that after 



POPULATION AND IMMIGRATION 401 

a reasonably lengthy honeymoon the husband must go tO' America 
to make his fortune, when he may come back again tO' his wife. 
While away they all cDnscientiously supply their families with the 
necessary means of living, thus again, like the Chinese, becoming 
no permanent benefit to the United States, their earnings never 
staying in the country. The little checks of money which the 
Slovaks in America send to their relatives and friends in Hungary, 
although usually for very small sums, represent vast fortunes tO' 
these modest people. This Slovak emigration sometimes depopu- 
lates whole villages. 

216. The Causes of Emigration from Italy. 

CY EI.IOT LORD. 

The main underlying cause inciting emigration from Italy was 
the pressure of population upon the means of subsistence. In 
spite of despotic oppression, foreign invasion and internal dissen- 
sion, the population of Italy at the time of the unification was 
nearly double what it was at the beginning of the eighteenth cen- 
tury. The census of 1881 showed a population oi 257 to the square 
mile, and thus was obvio'Usly fast advancing ; for, twenty years later, 
in spite of the great efflux, the population had increased to 
32,475,253, or 294 to the square mile. 

There was nO' diversification or development of industry through- 
out the greater part of the kingdom to keep pace with this increase. 
Except in the Northern Provinces there was practically no industry 
deserving the name outside of agriculture, and that pursued in a 
fashion little changed since the days of the Medici. Less than fifty 
years ago there was not a railroad in vSicily, and in all the Neapol- 
itan provinces the total length of railways was a scant one hundred 
and fourteen miles. Tuscany had only 284 miles of railway at the 
opening oi the year i860. 

Moreover, the monopoly of the land in the hands of aristocratic 
proprietors was a discouraging obstacle to- the advancement of the 
condition of the people in the agricultural districts by a distribution 
of the land among the peasant proprietary. Even when small hold- 
ings were secured independently in exceptional cases, they could 
hardly be maintained under a burden of taxation from which the 
poorest landholder could obtain no- relief. There was no exemption 
for any kind of real estate, and the weight of taxation, even after 
the reconstruction of Italy, continued to fall disproportionately on 
the agricultural sections. 

Moreover, the taxes were so^ assessed that the small landholder 



402 READINGS IN ECONOMIC PROBLEMS 

often feared to improve his estate lest the tax should be raised 
exorbitantly. The soi-called family tax, imposed by the com- 
munes, was particularly obnoxious from the inc|uisition of its con- 
duct and its varying with the localities and individual official judg- 
ment. It was certainly unequal and often corrupt and unfair. 

The milling monopoly and the government monopolies of salt 
and tobacco have been particularly irksome also' to the poor man, 
and his resentment is embittered by the daily parade of armed 
guards patroling the coast to prevent people from' stealing- sea water 
in buckets to obtain the salt. There is an attempted relief from 
the aggravation of these burdens throiigh the protectionist policy 
strictly adhered to by the governmient of United Italy, yet the 
heavy duties on the large quantities of foodstuffs, which are neces- 
sarily imported to supply the demands O'f the people, have made 
even this protection largely a. burden whose weight is the most 
grievous to those least able to- bear it. 

217. Emigration from Russia. 

BY JAMES DAVENPORT WHELPI^EY. 

Nearly all the Russian emigrants to England and the United 
States are of the Jewish faith, and leave Russia because of con- 
ditions unfavorable to their happiness and prosperity. 

The Jews of Russia number about 5,000,000, and most of them 
live within what is called the Jewish Pale. Within the Jewish ter- 
ritory must also be included Poland, the combined population of 
these two districts being something over 40,000,000. Under normal 
conditions this territory would support this population in comfort 
and furnish adequate employment to all in the development of its 
resources ; but the conditions are far from normal. 

What are called the "May Laws" of 1882, enacted by the Rus- 
sian Government, provided that only those Jews who had complied 
with certain requirements, and thus established a legal right of 
residence prior to that year, should be allowed to live in the rural 
districts. All other Jews were driven into the towns. 

This led not only to a congestion of population, but of all em- 
ployments as well; and as the Russian laws still further limit the 
outlet for Jewish activity, life became most sadly burdensome for 
these people. No employment paid for directly or indirectly by the 
Government is open to the Jew, nor can he obtain any work from 
the municipality in which he resides. The Government also en- 
deavours to prevent the Jew from obtaining work upon any enter- 
prise over which there is Government supervision. They are rigidly 



POPULATION AND IMMIGRATION 403 

excluded from railway positions, even the humblest, and in these 
and a thousand other ways are made to feel the opprobrium of their 
descent and religion. 

Overwhelming competition to obtain a living resulted from these 
conditions. The population of the cities increased enormously, and 
in these congested centres began a fierce struggle for existence. Of 
course, all the Jews in Russia are not poor or persecuted. The 
occupations of merchants or traders are open tO' them, and hardly 
a transaction can be brought about in which a Jew does not take 
part. The reason assigned by the Government for the enactment of 
the "May Laws" was the charge that the Jews were oppressing 
the Russian peasantry in the transaction of business. That they 
did have control oi the commerce of the country is probably true. 
That they took advantage of this control may be possible. However 
just these charges may be, there is no question as to the effect of 
the existing laws and regulations upon the population of that coun- 
try and indirectly upon England and the United States, for they 
are the cause of a very large part of the emigration. 

At the present time there is little prospect oi immediate change 
in the conditions which are causing the large Russian emigration, 
and, stimulated alsO' by the desire to escape military service, immi- 
gration into other countries from Russia will probably continue 
at or even exceed the present rate for some time to come. 

218. The Old Immigration and the New. 

BY THIS IMMIGR.\TI0N COMMISSION. 

During the entire period for which statistics are available, 18 19 
to 1910, a total of 25,447,180 European immigrants were admitted 
to the United States. Of these 15,968,689, or 62.8 per cent, came 
from northern or eastern parts of Europe, and 9,478,491 from 
southern and eastern Europe and Turkey in Asia. For convenience 
the former are called "the old immigration'' and the latter "the new 
immigration." The former was largely a movement of settlers 
who came from the most enlightened sections oi Europe for the 
purpose of making their homes in the New World. They entered 
practically every line of activity in nearly every part of the country. 
Many of them entered agricultural pursuits, sometimes as inde- 
pendent farmers, more often as farm laborers, who as a rule soon 
became independent farmers. They formed a great part oi the 
westward movement during the last century. They mingled freely 
with the native Americans and were quickly assimilated. The racial 
identity of their children has almost been lost and forgotten. 



404 ■ READINGS IN ECONOMIC PROBLEMS 

On the other hand the new immigration has been largely a 
movement of the unskilled laboring men, who have come, in large 
part temporarily, from the less enlightened and advanced couintries 
of Europe in response to the call for industrial workers in the 
eastern and middle western states. They have almost entirely 
avoided agricultural pursuits, and in cities have congregated in 
sections apart from the native Americans. As a class they are far 
less intelligent than, the old, more than one-third of those over 14 
years of age being illiterate when admitted. Racially they are for 
the most part essentially unlike the people who came in the period 
prior to 1880, and generally speaking they are actuated by different 
ideals. They come with the intention of profiting in a pecuniary 
way by the superior advantages in the New World and then re- 
turning to the old country. 



E. IMMIGRATION AND THE INDUSTRIAL SYSTEM. 
2ig. Our Industrial Debt to Immigrants. 

BY Pi;Te:r ROBERTS. 

The new immigration in one respect differs very markedly from 
the old; the percentage of farmers and farm laborers in this new 
stream is sixfold what it was in the old. In the last decade, the 
countries of southeastern Europe have sent us two and a half mdl- 
lion men, who, in the old country, were tillers of the soil ; but it 
is safe to say that the number following that occupation in the new 
world is insignificant. They are employed in industrial plants, in 
which their labor brings quick returns, and if dissatisfied with 
wages and conditions they can, in a day, pull up stakes and go 
elsewhere. The new immigration consequently contains more un- 
skilled workers than the old. The vast majority of men entering 
the industries do so as unskilled laborers. 

America, two generations ago, was an agricultural nation ; to- 
day it stands in the van of the industrial nations of the earth. This 
marvelous development, the astonishment of the civilized world, 
could never have taken place, if Europe and Asia had not supplied 
the labor force. From 1880 to 1905 the total capital in manufac- 
turing plants increased nearly fivefold, the value of the products 
increased more than two and a half times, and the labor force 
about doubled. America could never have finished its transcon- 
tinental railroads, developed its coal and ore deposits, operated its 



POPULATION AND IMMIGRATION 405 

furnaces and factories, had it not drawn upon Europe for its labor 
force; for it was impossible to secure "white men" to do this work. 

American industry had a place for the stolid, strong, submis- 
sive and patient Slav and Finn ; it needed the mercurial Italian and 
Roumanian ; there was much coarse, rough, and heavy work to dO' 
in mining and construction camps ; in tunnel and railroad building ; 
around smelters and furnaces, etc., and nowhere in the world could 
employers get laborers so well adapted to- their need, as in the 
countries of southeastern Europe. The new immigration has ad- 
mirably supplied the need, and at present, there is not an indus- 
trial community east of the Mississippi and north of the Ohio and 
Potomac rivers, where the "foreigners" are not found. 

Eouis N. Hammerling, President of the American Association 
of Foreign Newspapers, appearing before the Federal Commission 
on Immigration, said: (i) Sixty-five per cent of the farmers 
owning farms and working as farm laborers are people whO' came 
from Europe during the last thirty years. (2) Of the 890,000 
miners, mining the coal to operate the great industries, 630,000 
are our people. (3) Of the 580,000 steel and iron workers em- 
ployed in the different plants throughout the United States, 69 per 
cent, according to the latest statistics of the steel and iron indus- 
tries, are our people. (4) Ninety per cent of the labor employed 
for the last thirty years in building the railways has been furnished 
by our immigrant people, who- are now keeping the same in re- 
pair. 

The census of 1900 showed that 75 per cent of the tailors of the 
country were foreign-born. The investigation of the Immigration 
Cominission showed 72.2 per cent of the workers in the clothing 
trades foreign-born, and another 22.4 per cent was made up of 
the children of foreign-born parents ; thus 94.6 per cent of the men 
and women v/ho manufacture ready-made garments are of foreign 
parentage. Rousseau said of his Emile, that he would rather see 
him: dig than ply the needle and that a young lad should never 
aspire to be a tailor; the above statistics imply that there is a like 
aversion on the part of the native-born to the tailoring trade. 

Wherever unskilled work is needed, the foreigner is the one 
who does it ; but the managing force is generally made up of the 
native-born or, at least, English-speaking peoples. In the cloth- 
ing trade the foreign-born is a skilled workman; in every other 
industry he is the man who carries the heavy burden — he is the 
toiler, the drudge, the "choreman." In the slaughtering and meat- 
packing industry, the foreign-born comprise about 60 per cent 
of the labor force, but if you want to locate the sons of the new 



4o8 READINGS IN ECONOMIC PROBLEMS 

and previous training, from other countries of Europe. The 
courage and loyalty O'f these men were tested and tried and not 
found wanting. They have not shrunk from the dangers of the 
mines nor the heat of the mills ; hundreds of them have been killed 
on railroads; and still the foreigners do the work, and the disagree- 
ableness of foundries and meat packing plants has no deterring 
effect upon them. Let us be just tO' the workers of the new immi- 
gration and pay the tribute of praise due them for the part they have 
played in the industrial expansion of which we are proud. 

220. Immigration and Industrial Progress, 

BY WILTJAM S. ROSSITe;R. 

It must not be overlooked that society in the United States has 
been so constructed as to depend upon the continued arrival of 
large numbers of foreigners. In consequence, labor conditions 
prevailing in this nation differ radically from those which prevail 
in most of the countries of Europe, where all econoraic require- 
ments are met by natives. In England, in France, or in Germany, 
for example, the man who sweeps the streets, the laborer upon 
public works or in mines, and the woman who cooks or perfomis 
other domestic duties, are as truly native as the ruler of the nation 
or the statesmen who guide its destinies. In the United States, the 
man who sweeps the streets, who labors upon public works, in mines 
or on railroads, and the woman engaged in domestic service, if 
white, are almost all of foreign birth. The native stock has learned 
to regard such callings as menial and hence as lowering to self- 
respect. Having accepted the education and opportunity which the 
Republic offers them, native Americans appear to consider that they 
are untrue to themselves if they do not avoid humble occupations 
and seek those regarded as an advance in the social scale. There 
is, therefore, a coinstant movement away from the lower callings 
toward the higher; and occupants for the places thus vacated are 
recruited from foreigners. They in their turn become imbued with 
the American idea, acquire confidence and develop ambition, and 
their children abandon to newer arrivals the callings which support- 
ed their parents. Evidence of this continued movement upward is 
seen in the unwillingness, not only of the native stock but of the 
children of the foreign element, to continue in the servant or so- 
called menial classes, and in the determination on the part of voung 
women to become shop girls, telephone-operators, typewriters and 
shop and factory operatives, oftentimes at the penalty of severe 
privation, rather than to go out to service. 



POPULATION AND IMMIGRATION 409 

This tendency creates the prohlem of a constant shortage of 
workers in the humibler callings. These callings in themselves are 
as necessary in a republic as in an empire. Therefore workers in 
such occupations must in the future, as in the past, continue to> be 
recruited from abroad, or else a large number of native Americans, 
and children of foreign parents, must be contented to labor un- 
complainingly in the lower walks of life. It is possible that the 
former condition may continue indefinitely, but it unquestionably 
tends toward instability, for a nation which permanently meets by 
importation its demand for workers is, in a sense, artificially con- 
structed. 

When the young United States started upon a career of inde- 
pendence, the inhabitants concentrated their efforts upon the de- 
velopment of national resources. They prayed for wealth, and 
Providence gaA^e them the immigrant as the means of securing it. 
After the lapse of a century, our success surpasses the wildest 
dreams of our ancestors ; the United States has grown marvelously 
in numbers, and has obtained a prosperity unprecedented in the 
history of the world. 

It is unlikely that our portals, thus far ever open to the aliens of 
all Europe, will be closed to them until it has been conclusively 
shown that the existence oi the nation is imperiled by their com- 
ing, or until large numbers of worthy and industrious American 
citizens are obviously deprived of their means of livelihood by the 
arriving throngs of foreigners. At the present time there is nothing 
which points to the realization of these conditions ; and, until there 
is, discussion concerning the restriction is in reality idle. Therefore 
let us be practical, nursing no delusions, and face conditions as 
they are. We have always needed the immigrant to aid us in 
amassing wealth, and we shall need him in the future, for the 
United States has now become the great labor mart of the world. 

221. Immigration and Wealth Production. 

BY JOHN R. CO'MMONS. 

Over four-fifths of the immigrants are in the prime of life, the 
ages between fourteen and forty-five. The census of 1900 ofifers 
some interesting comparisons between the native-born and the for- 
eign-born in this matter of age distribution. It shows quite plainly 
that a large proportion of the native-born is below the age of in- 
dustrial production, fully thirty-nine per cent being under fifteen, 
while only five per cent of the foreign-born are of corresponding 
ages. On the other hand the ages fifteen to forty-four contain 46 



4IO READINGS IN ECONOMIC PROBLEMS 

per cent of the native and 58 per cent of the foreign-born. Thus, 
immigration brings to us a population of working ages unhampered 
by unproductive mouths to be fed, and, if we consider alone that 
which produces the wealth of the country, the immigrants add more 
to the country than does the same number of natives of equal abil- 
ity. Their home countries have borne the expense of rearing them 
up to the industrial period of their lives, and then America reaps 
whatever profits there are on the investment. 

In another respect does immigration add more than an equal 
increase in the native population would, namely, by the large ex- 
cess of men over women. In 1906 over two-thirds of the immi- 
grants were males. 

Such being the proportions of industrial energy furnished by 
immigration, what is the quality ? Much the larger proportion of 
immigrants are classed as unskilled, including laborers and servants. 
Omitting those who have "no occupation," who are 30.5 of the total, 
only 21.7 of the remainder who are working immigrants are skilled, 
and 73.4 per cent are unskilled. 

The skilled labor which comes tO' America occupies a peculiar 
position in our industries. The more capable workmicn have per- 
manent places at home, and it is only those who cannot command 
situations who seek their fortunes abroad. As for the bulk of 
skilled immigrants they do not represent the highest skill of the 
countries from which they come. On the other hand the European 
skilled workman is usually better trained than the American, and 
in many branches of industry the English and Scotch immigrants 
command those superior positions where an all-round training is 
required. 

This peculiar situation is caused by the highly specialized char- 
acter of American industry. In nO' country has division of labor 
and machinery been carried as far as here. By division of laboir 
the skilled trades have been split up into simple operations, each of 
which in itself requires little or no skill. Even in the building 
trades in the larger cities there are as many kinds of bricklayers as 
there are kinds of walls to be built, and as many kinds of car- 
penters as there are varieties of woodwork. So' it is with ma- 
chinery. Consequently, xA.merican industry is not producing all- 
round mechanics, and the employers look to Europe for their skilled 
artisans. In England the trade-unions have made it their business 
to see that every apprentice learns every part of his trade, and they 
have prevented employers from splitting up the trades and special- 
izing machinery, and thereby transforming the mechanic into a 
hand. Were it not for immisrration, American industries would 



POPULATION AND IMMIGRATION 



411 



ere now have been compelled to give more attention to apprentice- 
ship and the training of competent mechanics. 

Not omly does immigTation bring to America the strongest, 
healthiest, and most energetic and adventurous of the work-people 
of Europe and "Asia, but those who come work much harder than 
they did at home. Migration tears a man away from the tra- 
ditions, the routine, the social props, on which he has learned to 
rely, and throws him among strangers upon his own resources. 
He must swimi or drown. At the same time he earns higher wages 
and eats more nourishing food. His ambition is fired, he is stirred 
by the new tonic of feeling himself actually rising in the world. 
He pictures to himself a home of his own. He economizes and 
saves money to^ send to his friends and family, or to return to his 
beloved land a person of importance. Watch a gang of Italians 
shoveling dirt under an Irish boss, and you will see such feverish 
production of wealth as an Amierican-born citizen would scarcely 
endure. Partly fear, partly hope, make the fresh immigrant the 
hardest, if not the most intelligent, worker in our industries. 

222. Immigration and Crises. 

BY HENRY PRATT FAIRCHILD. 

There is a close and peculiar connection between immigration 
and the frequent recurrence of economic crises. This connection is 
caused as w^ell as casual. The popular interpretation of this fact 
is that the emigration movement serves to mitigate the evils of the 
crisis by removing a large part of the surplus laborers until re- 
turning prosperity creates a demand for them again. Thus the 
movements of our alien population are supposed to be an alleviating 
force as regards crises. 

The question arises, however, in this connection, whether there 
is not a converse casual relation ; in other words, whether the con- 
ditions of immigration are not partly responsible for the recurrence 
of these periods. Professor Commons demonstrates how immi- 
gration, instead of helping matters, is really one of the causes of 
crises. His conclusion is that "immigration intensifies this fatal 
cycle O'f 'booms' and 'depressions,' " and "instead of increasing the 
production of wealth by a steady, healthful growth, joins with 
other causes tO' stimulate the feverish overproduction, with its in- 
evitable collapse, that has characterized the industry of America 
more than that of any other country." 

First of all, it will be desirable to see just what the facts of 



412 



READINGS IN ECONOMIC PROBLEMS 



immigration and emigration dinring this period are : then we shall 
be prepared to attempt their interpretation. 

The monthly average of arrivals during the first six months 
of 1907 was a high one. Following a large immigration during 
the last six months of the preceding year, this made the fiscal year 
ending June 30, 1907, the record year for immigration in the 
history of the country. For the next four months the stream of 
immigration continued high, considering the season, and the num- 
ber of departures was moderate. Early in October, however, there 
was signs of disturbance in the New York Stock Exchange. On 
the sixteenth there was a crash in the market, and within a week 
the panic had become general. It reached its height on October 24^ 
and continued for many weeks after. The response of the alien 
population to this disturbance was almost immediate, and mani- 
fested itself first in the emigration movement. In November the 
number of departures almost doubled. But the immigrants who 
were on the way could not be stopped, and in spite of the large 
exodus there was a net gain of 38,207 during the month. The next 
month, December, however, saw a marked decrease in the stream 
of arrivals, which, accompanied by a departure of aliens almost as 
great as in November, resulted in a net decrease in population 
of 11,325 for the month. During the first six months of 1908 the 
number oi arrivals was small, and the departures numerous, so 
that, with the exception of March, each month shows a net loss 
in popuilation. During July the number of departures began to 
approach the normal but the arrivals were sO' few that there was 
still a decrease for the months of Juily and August. In September, 
1908, the balance swung the other way, and from that time to the 
present tyery month, with the exception of December, 191 1, has 
shown a subistantial increase in population through the movement 
of aliens. 

It is evident, then, that the effects of the crisis on emigration 
were immediate, but not of very long duration. During the months 
of November and December, 1907, when the distress was the keen- 
est, there were still large numbers of aliens arriving. But when 
the stream of immigration was once checked, it remained low for 
some time, and it was not until about January, 1909, that it re- 
turned to what may be considered a normal figure. The reasons 
for this are obvious. The stream of immigration is a long one, and 
its sources are remote. It takes a long time for retarding influences 
in America to be thoroughly felt on the other side. 

Now what catches the public eye in such an epoch as this is the 
large number of departures. But if we stop to add up the monthly 



POPULATION AND IMMIGRATION 413 

figures, we find that for the entire period after the crisis of 1907, 
when emigration exceeded immigration, the total decrease in ahen 
population was only 124,124, — scarcely equal to the immigration of 
a single month during a fairly busy season. This figure is almost 
infinitesimal compared with the total mass of the American work- 
ing people, or to the amount of unemployment at a normal time, 
to say nothing oif a crisis. It is thus evident that the importance 
of our alien population as an alleviating force at the time of a crisis 
has been vastly exaggerated. The most that can be said for it is 
that it has a very trifling palliative effect. 

The really important relation between immigration and crises 
is much less conspicuous but much more far-reaching. It rests 
upon the nature and underlying causes of crises in this country. 
These are fairly well understood at the present time. A typical 
crisis may be said tO' be caused by speculative overproduction, or 
overspeculative production. In a normal business period some slight 
disturbance, such as ah increase in the quantity of gold, causes 
prices to rise. A rise in prices is accompanied by increased profits 
for business men, because the rate of interest on the borrowed cap- 
ital which they use in their business fails to increase at a cor- 
responding ratio. Hence, doing' business on borrowed capital be- 
comes very profitable, and there is an increased demand for loans. 
This results in an increase of the deposit currency, which is accom- 
panied by a further rise in prices. The nominal rate of interest 
rises somewhat, but not sufficiently, and prices tend to outstrip it 
still further. Thus the process is repeated, until the large profits 
of business lead to a disproportionate production of goods for an- 
ticipated future demand, and a vast overextension of credit. Other 
causes operate with this to produce the same result. The conse- 
quence is that business men find themselves unable to renew their 
loans at the old rate, and hence some of them are unable to meet 
their obligations, and fail. The failure of a few firms dispels the 
atmosphere of public confidence, which is essential to extended 
credit. Creditors begin to demand cash payment for their loans ; 
their is a growing demand for currency ; the rate of interest soars ; 
and the old familiar symptoms of a panic appear. In this entire 
process the blame falls primarily upon the failure of the rate of 
interest to rise promptly in proportion tO' the rise in prices. 

The rate of interest represents the .payment which the entre- 
preneur makes for one of the great factors of production — capital. 
If wages fail to rise along with prices, the effect on business, while 
not strictly analogous, is very similar to that produced by the slowly 
rising rate of interest. The entrepreneur is relieved of the neces- 



414 



READINGS IN ECONOMIC PROBLEMS 



sity of sharing any of his excessive profits with labor, just as in 
the other case he is relieved from sharing them with capital. It 
would probably be hard tO' prove that the increased demand for 
labor results in further raising prices in general, as an increased 
demand for capital results in raising prices by increasing the de- 
posit currency. But if the demand for labor results in increasing the 
number of laborers in the country, thereby increasing the demand 
for commodities, it may very well result in raising the prices of 
commodities as distinguished fromi labor, which is just as satis- 
factory tO' the entrepreneur. This is exactly what is accomplished 
when unlimited imimigration is allowed. As soon as the conditions 
of business produce an increased demand for labor, this demand 
is met by an increased number oi laborers, produced by immi- 
gration. 

In the preceding paragraph it has been assumed that wages 
do not rise with prices. The great question is, is this true? This 
is a question very difficult to answer. There is a very general im- 
pression that during the last few years prices have seriously out- 
stripped wages. 

But whether or not wages rose as fast as prices in the years 
from 1900 to 1907, one thing is certain, they did not rise any faster. 
That is to say, if real wages did not fall, they assuredly did not 
rise. But the welfare of the country requires that, in the years 
when business is moving toward a crisis, wages should rise ; not 
only money wages, but real wages. What is needed is some check on 
the vmwarranted activity of the entrepreneurs, which will make 
them stop and consider whether the apparently bright business out- 
look rests on sound and permanent conditions, or is illusory and 
transient. If their large profits are legitimate and enduring, they 
should be forced to share a part of them with the laborer. If not, 
the fact should be impressed upon them. We have seen that the 
rate of interest fails to act as an efficient check. Then the rate 
of wages should do^ it. And if the entrepreneurs were compelled 
to rely on the existing labor supply in their own country, the rate 
of wages would do it. But in the vast peasant population of Europe 
there is an inexhaustible reservoir oi labor, only waiting a signal 
from this side to enter the labor market — to enter it, not with a de- 
mand for the high wage that the business situation justifies, but 
ready to take any wage that will be oiffered, just so it is a little 
higher than the pittance to which they are accustomed at home. 
And we allow them to come, without any restrictions whatever as 
to numbers. Thus wages are kept from rising, and immigration 
becomes a powerful factor, tending to intensify and augment the 
unhealthy, oscillatory character of our industrial life. 



POPULATION AND IMMIGRATION 415 

223. The Standard of Living of the New Immigrants. 

BY I. A. HOURWICH. 

The oibjection to the unskilled immigrant is based upon the 
belief that because of his lower standard of living he is satisfied 
with lower wages than the American or the older immigrant. It 
is therefore taken for granted that the effect of the great tide of 
immigration in recent years has been to- reduce the rate of wages 
or to prevent it from rising. The fallacy of this reasoning is due 
to an attempt to compare the standard of living of the unskilled 
laborer with that of the skilled mechanic. To prove that the newer 
immigrants have introduced a lower standard of living, the latter 
ought to be compared with the standard of living of unskilled 
laborers in the past. 

Housing conditions have been most dwelt upon, because they 
strike the eye oi the outsider. Historical studies of housing con- 
ditions show, however, that congestion was recognized as a serious 
evil in New York City as far back as the first half of the nine- 
teenth century. The evil was not confined to the foreign-born 
population. American-born working-women lived on filthy streets 
in poorly ventilated houses, crowding in one or tw^o^ rooms, which 
were used both as dwelling and workshop. No better were the 
living conditions of the daughters of American farmers in the mill 
towns of New England. They lived in company houses, half a 
dozen in one attic room, without tables or chairs, or even wash- 
stands. The typical tenement house in the Jewish and Italian 
section of New York today is a decided improvement upon the 
dwellings of the other immigrant races in the same sections a 
generation or two ago. On the other hand, in the South, where 
many of the coal mines are operated without immigrant labor and 
native white Americans are employed, their homes are primitive 
and unsanitary. The cause of bad housing conditions is not racial, 
but economic. Congestion in the cities is produced by industrial 
factors, over which the immigrants have no control. The funda- 
mental cause is the necessity for the wage- worker to live within an 
accessible distance from his place of work. Moreover, the recent 
immigrants are mostly concentrated in great cities, where rent is 
high, while the native American workmen live mostly in small towns 
with low rents. 

Nor are the food standards of the recent immigrant inferior 
to those of native Americans with the same income. Meat is con- 
sumed by the Slav in larger quantities than by native Americans. 
Rent and food claim by far the greater part of the workman's 



4i6 READINGS IN ECONOMIC PROBLEMS 

wages. It is thus apparent that whatever may have been the immi- 
grant's standard of living in his home country, his expenditure in 
the United States is determined by the prices ruhng in the United 
States. Contrary to common assertion, the living expenses of the 
native American workman in small cities and rural districts are 
lower than those of the recent immigrants in the great industrial 
centres. It is therefore not the recent immigrant that is able to 
underbid the native American workman, but it is, on the contrary, 
the latter that is in a position to accept a cheaper wage. 

Of course the expenses of a single man are necessarily lower 
than those of a man with a family, and a large proportion of recent 
immigrants either are single, or have left their families abroad. 
But, while an unmarried American workman may either save or 
spend the difference, the recent immigrant is obliged to save a part 
of his earnings. So when a recent irrtimigrant is seen to deny himself 
every comfort in order toi reduce his personal expenses to a mini- 
mum, it is a mistake to assume that he will accept a wage just 
sufficient toi provide for his own subsistence. The Italian section- 
hand who lives on vegetables does not save money for the railroad 
company. The economic interests of the American wage- earner 
are therefore not affected by the tendency of the recent immigrant 
to live as cheaply as possible and to save as much as possible. Even 
if he merely sends his money home, his wants are as urgent as 
those of the American laborer who spends his all, and he must de- 
mand a wage that will enable him to satisfy them;. 

Even if the standard of living of the native wage-earners be 
higher, it is often maintained with the earnings of children, whereas 
the Southern and Eastern European immigrants are mostly young 
people whose children have not yet reached working age. 

224. Immigration and Wages. 

BY I. A. HOURWICH. 

The primary cause which has determined the movement of wages 
in the United States during the past thirty years has been the 
introduction of labor-saving machinery. The effect of the substi- 
tution of mechanical devices for human skill is the displacement 
of the skilled mechanic by the unskilled laborer. This tendency 
has been counteracted in the United States by the expansion of 
industry; while the ratio of skilled mechanics to the total operating 
force was decreasing, the increasing scale of operations prevented 
an actual reduction in numbers. Of course this adjustment did not 
proceed without friction. While, in the long run, there has been 



POPULATION AND IMMIGRATION 417 

110 displacement of skilled mechanics by unskilled laborers in the 
industrial field as a whole, yet at certain times and places individual 
skilled mechanics were doubtless dispensed with and had to seek 
new employment. The unskilled laborers who replaced them were 
naturally engaged at lower wages. The fact that most of these 
unskilled laborers were immigrants disguised the substance of the 
change — the substitution of unskilled for skilled labor — and made 
it appear as the displacement of highly paid native by cheap immi- 
grant labor. 

To prove that immigration has virtually lowered the rates of 
wages would rec[uire a comparative study of wages paid for the 
same class of labor in various occupations before and after the 
great influx of immigrants. This, however, has never been at- 
tempted by the advocates of restriction. In fact, the chaotic state of 
our wage statistics precludes any but a fragmentary comparison 
for different periods. In a general way, however, all available data 
for the period of "the old immigration" agree that the wages of 
unskilled laborers, and even of some of the skilled mechanics did 
not fully provide for the support of the wage-earner and his family 
in accordance with their usual standards of living. The shortage 
had to be made up by the labor of the wife and the children. 

If the tendency of the new immigration were to lower the rates 
of wages or to retard the advance of wages, it should be expected 
that wages would be lower in great cities where the recent immi- 
grants are concentrated, than in rural districts where the population 
is mostly of native birth. All wage statistics concur, however, in 
the opposite conclusion. Since the United States has become a 
manufacturing country average earnings per worker have been 
higher in the cities than in the country. The same difference exists 
within the same trades between the large and the small cities. 
Country competition of native Americans often acts as a depressing 
factor upon the wages of recent immigrants. This fact has been 
demonstrated in the clothing industry, in the cotton mills, and in 
the coal mines. 

Furthermore, if immigration tends to depress wages, this ten- 
dency must manifest itself in lower average earnings in states with 
a large immigrant population than in states with a predominant 
native population. No such tendency, however, is discernible from 
wage statistics. As a rule, annual earnings are higher in States 
with higher percentage of foreign-born workers. 

The conditions in some of the leading industries employing 
large numbers of recent immigrants point to the same conclusions. 
In the Pittsburgh steel mills the rates of wages of various grades 



418 RB A DINGS IN ECONOMIC PROBLEMS 

of employees have varied directly with the proportion of recent 
immigrants. The wages of the aristocrats of labor, none of whom 
are Southern or Eastern Europeans, have been reduced in some 
cases as much as 40 per cent; the money wages of the skilled and 
semi-skilled workers, two-thirds of whom are natives or old immi- 
grants, have not advanced notwithstanding the increased cost of 
living, while the wages of the unskilled laborers, the bulk of whom 
are immigrants from Southern and Eastern Europe, have been 
going up. 

In the cotton mills of New England the last quarter of the nine- 
teenth century, when the operatives were practically all of the 
English-speaking races, was a period of intermittent advances and 
reductions in wages ; on the Avhole, wages remained stationary. The 
first years of the present century, up to the crisis of 1908, were 
marked by the advent of the Southern and Eastern Europeans into 
the cotton mills, and by an uninterrupted upward movement of 
wages. The competition of the cheap American labor of the 
Southern cotton mills, however, tends to keep down the wages of 
the Southern and Eastern European, Armenian, and Syrian immi- 
grants employed in the New England mills. 

As a general rule, the employment of large numbers of recent 
immigrants has gone together with substantial advances in wages. 
This correlation between the movements of wages and immigra- 
tion is not the manifestation of some mysterious racial trait, but 
the plain woirking of the law of supply and demand. The em- 
ployment of a high percentage of immigrants in any section, in- 
dustry, or occupation, is an indication of an active demand for 
labor in excess of the native supply. Absence of immigrants is a 
sign of a dull labor market. 

225. Immigration and Unionism. 

BY W. JKTT LAUCK. 

A significant result of the extensive employment of southern 
and eastern Europeans in mining and manufacturing is seen in 
the general weakening and, in some instances, in the entire demor- 
alization of the labor organizations which were in existence before 
the arrival of the races of recent immigration. This condition of 
affairs has been due to the inability of the labor-unions to absorb 
within a short time the constantly increasing number of new ar- 
rivals. The southern and eastern Europeans, as already pointed out, 
because of their tractability, their lack of industrial experience and 
training, and their necessitous condition on applying for work, have 



POPULATION AND IMMIGRATION 419 

been willing to- accept, without protest, existing conditions of em- 
ployment. Their desire to earn as large an amount as possible 
within a limited time has also- rendered the recent immigrant averse 
to entering into strikes which involved a loss of time and a decrease 
in earnings. The same kind of thriftiness has led the innmigrant 
wage-earner to refuse to maintain his membership in the labor- 
unions for an extended period and has consequently prevented the 
com,plete unionization of certain occupations in some cases, and, in 
others, the accumulation of a defense fund by the labor organiz- 
ations. The high degree of illiteracy among recent immigrants 
and the inability of the greater number to speak English have 
also caused their organization into unions by the native Americans 
and older immigrants to- be a matter of large expense. The diffi- 
culty of the situation, from the standpoint of the labor organizations, 
is further increased by the conscious policy of the employers of 
mixing races in certain departments or divisions of industries and 
thus decreasing the opportunities for any concerted action because 
of a diversity of language in the operating forces. In mining oper- 
ations, by way of illustration, in many sections, no one race is 
permitted to secure a controlling number in the operating forces 
of a single mine or mining occupation because of the fear that a 
comsmon language would enable them: to be readily organized for 
the purpose of seeking redress for real or fancied grievances. 



F. RACIAL ASPECTS OF THE IMMIGRATION PROBLEM. 
226. The Effects of Emigration on Greece. 

BY HENRY P. FAIRCHILD. 

The effects of immigration upon Greece are in the main con- 
nected with two phenomena — the influx of money from America, 
and the withdrawal of the laboring force from the country. As 
to the formxcr it may at first seem surprising that the small sum 
which covers the amount of the annual remittance should exercise 
such a profound influence on the economic situation in Greece. But 
a moment's consideration will make this plain. The average an- 
nual amount sent from the United States to Greece is $5,000,000. 
The general imports into Greece in 1905 amounted tO' $27,170,533, 
and the exports to $16,095,184. It thus appears that the amount 
of money flowing into Greece each year, without any corresponding 
outgo, is in the neighborhood of one quarter of the total amount 



420 



REABFXGS IX EC0X03ITC 77. 1 7 IZMS 



wfaid* tbe OKUEiXi" receives fir "~ r~«:r:;. ir_i i? ±z.yigh to pay 
for cme-Sftli o€ ri? r:rr»:rr?. 

PeEbaps flie : tt : t r r :- r: :: 3MMier is 

ttae T vniitagiraKlf :\__ \^r - /. .: /. ir /. i i "'t ^t-:"!"".? 

eSed ot teaser J- r.. :;"..:,..„ ~:.- ::-: :: ./■.:'.:," ::~ " . r'i^rt 
cufjyrmi Biit, it ii ouiniaijcay t- :- _ r -'- : :: :.-r 

ixwiaitat aa a soond baas, k _ ;- r : t -: r t . . _- 

oilier beaieScial lesnli: 1b^5 :e±- it : ::;^ i: ;: i r^r tr 

of real estate miHl^age- Ii-^t t : tt r ^r 

wIm^Iv tieed tiOBi! mcnci: r^: Mr- : ' _ : - a^t': _ t "^:t :: 
inlesiesS has also faOoi decide 1 - ;vt -t - : ~: i:t 

mdrridnals lead moneir at Ic T~ :t t 

TTrar rorng ooir to injtttici-f t5r :: t : :: lis had a 

Terr deaiMHalizia^ euedt i^'i - : r -.ly oi me coantiy- Tbe 

Gfe^L lores bodi tise appeari :-. : t f;rt of Idsore, s'c -f ^H 
too readr to ^eod has days :: : t : ~Tr- .ises and on -. t r ;j:- 
eaaades, soaofen^ and taWrrr y t i ' j :'_ _ i t' t = ' r = 1 1 

hmmi^, 'uiiicli aie coiiiii^ iisr : : t : .::.:~ ..: . i\ _^ :r t; :: r^^t 
tins tendoicr. Tbe Gr^^ wbo cooae back fiom Ameiica with 



foirtiimes made incsease :'; ' ' " t dass and bdp to incnkaie 
lore of indc^ence in the rooi." : -; ' 2™d. As a lesnlt, Atfaens : 



are the orihr citier r^^ : t . " j iom wbicfa bare groir- rt- 
cssit%-- If ibk. naoney weie i : ' . - :. : : : ' e 'isrdopment of ^txd'uic- 
tire indas^sy, tbe lesmlts ir _ : rt riToraWe. Aside from 

wbat is ^jemt in ffeeia^ : r i r : i ' i :, t i;. tbe majorify of 
it is lased in finmidiiE^ _: ":te : :r : t ^"r in bnildiw^ Sne 
boisses. in esediii^ bsM tovreis and clocks on tbe cbnitbes. occasion- 
ally in some public ^oject l&e a road, and often in making pos^ble 
a life of baxmy. 

FsobaMy die greatest injury wron^it is in angmentii^ tbe f ef^er 
f <^ enngsation. It is abnc^ in^os^bie to find a yom^ man or a 
boy in tbe Tillages or on iSbtt farms wbo does not lire in belies of 
geiSia^ away to Anaesica as soon as possiMe. Gieece is one of Ibe 
few cotontiies in Bmope in wbicb tbe male pc^odation is coo^der- 
abihr in fiEiregig; «^ ^e fenaale. Between tbe years 1896 and 1907 
^btt total population inoeased by less fban e^it per cenL 'SSjok^ 
inqioftant is Ibe decided deoease in tbe e»£ss of tbe malcis. ^low- 
m^ tbe sex tsma. wbicb die balk of Ibe enngranfs bare bem le- 
ouiSed. As yet Ibis e%odns bas not caused any ^predaUe dedine 
in 1^ adtirafioa of Ibe sdSL Tbe d^ressioa (A c ui i ail indnstry 
vas o5%inally a cause, not a lesuk of e uiig i ali cM. Tbe caqiianation 
lies in iS^ fact tbat Ibe women bare taken biM of "Ai^ wmk. Tfaer 
are caaryii^ cm Ibe agncnbnre of iSae. coaa&ty wdl enou^ to sare 



POPULATION AXD IMMIGRATION 421 

the crops from niin. They have also entered many other depart- 
ments of manual labor. 

Immigrants from Albania have also been brought in to do held 
labor under Greek bosses. Another effect which has alarmed the 
authorities to a considerable extent is the marked decrease in the 
number of recruits for the army. This is something which comes 
close to the heart of the nation. The government has gone so far 
as to propose legislation regulating very strictly the conditions of 
emigration. But as yet the governmental proposals have not been 
passed. 

227. Labor and Chinese Competition. 

BY MARY ROBERTS COOLIDGE. 

Although there are less than half as many Chinese in California 
as in 1882, when restrictive legislation was passed, nearly all are 
receiving twice as much wages. In laundry work, one of the lowest 
paid of their occupations, the Chinese proprietors complain that the 
high wages demanded by their countrxTiien will drive them from 
the business. The Chinese have nearly deserted the factory- trades 
because they can earn so much more in small independent busi- 
nesses. 

Labor pamphlets have asserted that the Chinese had a monopoly 
of a large number of trades and businesses, that they excluded oth- 
ers from them, and permitted wages in these lines to fall below a 
living standard. As to wages the matter has been carefully can- 
vassed with the conclusion that wages in California, even in times 
of depression, never fell to the level of eastern cities. The Chinese 
were chiefly engaged in mining, horticulture, truck gardening, do- 
mestic senice, washing, and a number in independent businesses. 
It can scarcely be called a monopoly when the wages of an industry 
continue above the level of other states. Two facts disprove the 
monopoly theor\- so far as the Chinese are concerned. First the 
occupations having the largest number of whites unemployed for 
many years are not the ones in which the Chinese were chiefly en- 
gaged. The whites out of employment have been bookkeepers, 
clerks, blacksmiths, carpenters, painters, engineers, machinists, and 
|x>rters. The second fact is that Chinese labor has never remained 
cheap labor for any length of time. The Chinese were thoroughly 
organized into tongs long before the white laborers in California 
formed trade unions. Being disciplined in cooperative activity they 
were able to divert their own immigrant competitors into the occu- 
pations where opportunity was best. 

Like many ambitious and thrifty immigrants from Europe, the 



422 



READINGS IN ECONOMIC PROBLEMS 



Chinese came to^ make and save money ; one-third at least were 
married men, and all were imbued with the extreme sense of filial 
obligations characteristic of their race. They have, therefore, ex- 
acted as much for their labor as possible. The Chinese might work 
cheaply to learn, to get a foothold, but he soon demanded all that 
the business would bear. The fluidity of Chinese labor as compared 
with the immobility of American labor is its greatest advantage, 
combined as it is with the discipline of the tong organization and 
an almost universal tradition of honesty in keeping contracts. The 
Chinese draws a hard and haggling bargain with the employer ; but, 
having made it, lives up to it strictly. 

In all discussions of Chinese competition the factor most fre- 
quently overlooked is the intelligent ambition of the Chinese immi- 
grant. He is a Cantonese, from the most progressive province in 
China ; again, he is often a picked member of his family sent abroad 
to elevate the family fortune. He is not at all stolid and servile, 
but keenly alive to the better chance. He is onl}^ cheap when he is 
newly arrived and unusually stupid. Because of his thrifty habits 
O'f never spending more than he earns, the Chinaman generally has 
money and can better endure intermittent employment than the 
American workman. If necessary they can live frugally; they are 
self-restrained in their pleasures and vices. 

It is a mistake to suppose that the ordinary Chinese laborer lives 
penuriously — ^the truth rather is that he always lives within his in- 
come, whatever that may be. He can and does live cheaper than 
the American v.^orkingman because he knows how to feed himself 
better. In place of bread and potatoes, he uses rice which costs 
from two to three times as much, but is far more nutritious. He 
will have chicken and pork whenever he can afiford it. 

Since the Chinese have become relatively few among California 
wage earners, their superiority to other foreigners has caused them 
to become the standard of efficiency by which other labor is meas- 
ured. Their wages have steadily risen and they have almost wholly 
deserted the lower paid manufactures and couimon labor. 

228. The Italians in Boston, 

BY ROBERT A. WOODS. 

There is a special fitness in the Italians' choice of abode just 
next to the great fruit and vegetable markets. The citizens of Bos- 
ton owe a great debt to the Italians for organizing and developing 
the retail fruit trade throughout the city. Their efiforts have cre- 
ated a wholesome appetite for fruit among the masses O'f the peo- 



POPULATION AND IMMIGRATION 423 

pie. Believing in their goods, they have special skill in selecting, 
arranging and caring for it. 

The Italian represents a varied list of occupations. In the North 
End colony there are artisans, bakers, barhers, confectioners, mu^ 
sicians, tailors, scissors grinders, shoemakers, marble cutters, and 
workers in plaster. Many Italian boys are boot-blacks. An in- 
creasing number of Italian women, with a few men, engage in agri- 
cultural work in the market gardens of Arlington, Belmont, LyCx- 
ington, and adjoining tO'wns. The women bring some intelligence 
and endless assiduity tO' such work. Fully fifty per cent of the men 
of the Boston colony are engaged more or less regularly at heavy 
labor with pick and shovel, in railroad building, or in the construc- 
tion of gas and water-works. 

When the Italian laborer appeared among us, he was in bondage, 
nnder a cruel taskmaster. The Italian padrone took a large commis- 
sion for the purchase of the immigrant's steamer ticket, and, in 
many cases, with the assistance of the Italian banker, appropriated 
his savings wholesale. The padrone's methods have been limited 
as the years have passed. The Italian government now has regula- 
tions in force to protect its citizens as they leave the country. The 
absconding banker is becoming rare. One of the Italian banks at 
the North End does business under a name recognizably Irish, in 
the hope of convincing Little Italy that it is an American institution. 

The number of Italian real estate owners is very considerable. 
In the North End, in 1900, $2,325,800 worth of property was as- 
cribed in the city records to persons having Italian names. A few 
artists, musicians, and handicraftsmen have begun tO' appear among 
them. A considerable number of Italian women work with the men 
in the garment shops. Many Italians may be seen loafing around 
North Square, but as a rule they are simply waiting between jobs 
on large construction woirks. 

Italian gang laborers formerly received only $1.25 per day, but 
they are now freely ofl^ered $1.50 to $1.75. This is for work at a 
distance. They have to pay their car fare, and there are always 
possibilities that their wages will be heavily drawn upon for the 
victualling and shanty accommodations. Considering how much 
time they lose during the year, thc)^ are probably nO' better off than 
the fruit hav/kers, who make on the average $5 or $6 per week. 
Italian women on farms earn $1 per day. The Italian hurdy-gurdy 
grinder with the tambourine girl in peasant garb, who as a rule 
hires his instrument, makes a somewhat larger income than this. 

The Italians are frug-al and do not cultivate an appearance of 
elegance. The women are satisfied with simple fabrics in bright 



424 READINGS IN ECONOMIC PROBLEMS 

colors. The men are content with a gay necktie, curled and unctu- 
ous hair, and a brilliant polish to their shoes. Even micro'scopic in- 
comes do not forbid the Italians the practice of thrift. They save 
to go back to Italy, ov to bring friends over. Some save and be- 
come landowners and small business men. Many ditch diggers put 
by one hundred dollars in the course of the year. They do not 
easily fall back upon charitable agencies. 



G. THE DANGERS IN UNRESTRICTED IMMIGRATION. 
229. The Peril from the Immigrant. 

BY H. G. WISLLS. 

Will the reader please remember that I've been just a few weeks 
in the States altogether, and value my impressions at that! And 
will he, nevertheless, read of doubts that won't diminish. I doubt 
very much if America is going to assimilate all that she is taking 
in now; much more do I doubt that she will assimilate the still 
'greater inflow of the coming years. I believe she is going to find 
infinite difficulties in that task. By "assimilate" I mean make intel- 
ligently cooperative citizens of these people. She will, I have no 
doubt whatever, impose upon thenn a bare use of the English lan- 
guage, and give them votes and certain patriotic persuasions, but 
I believe that if things go on as they are going the great mass of 
them will remain a very low class — will remain largely illiterate 
industrialized peasants. They are decent-minded peasant people, 
orderly, industrious people, rather dirty in their habits, and with a 
low standard of life. Wherever they accumulate in numbers they 
present to my eye a social phase far below the level of either Eng- 
land, France, north Italy, or Switzerland. And, frankly, I do not 
find the American nation has either in its schools — which are as 
backward in some States as they are forward in others— in its press, 
in its religious bodies or its general tone, any organized means or 
effectual influences for raising these huge masses of humanity to 
the requirements of an ideal modern civilization. They are, to my 
mind, "biting off more than they can chaw" in this matter. 

Bear in mind always that this is just one questioning individual's 
impression. It seems to me that th« immigrant arrives an artless, 
rather uncivilized, pious, goodhearted peasant, with a disposition 
towards submissive industry and rude effectual moral habits. Amer- 
ica, it is alleged, makes a man of him. It seems to me that all too 



POPULATION AND IMMIGRATION 425 

often she makes an infuriated toiler of him, tempts him with dol- 
lars and speeds him up with competition, hardens him, coarsens his 
mianners, and, worst crime of all, lures and forces him to seil his 
children into toil. The home of the immigrant in America looks 
to me worse than the home he came from in Italy. It is just as 
dirty, it is far less simple and beautiful, the food is no more whole- 
some, the moral atmosphere far less wholesome; and, as a conse- 
quence, the child of the immigrant is a worse man than his father. 
I am fully aware of the generosity, the noibility of sentiment, 
which underlies the American objection to any hindrance to immi- 
gration. But either that general sentiment should be carried out 
to a logical completeness and gigantic and costly machinery organ- 
ized to educate and civilize these people as they come in, or it should 
be chastened to restrict the inflow to numbers assimilable under 
existing conditions.. At present, if we disregard sentiment, if we 
deny the alleged need of gross flattery whenever one writes of 
America for Americans, and state the bare facts of the case, they 
amount to this: that America, in the urgent process of individual- 
istic industrial development, in its feverish haste to get through 
with its material possibilities, is importing a large portion of the 
peasantr}^ of central and eastern Europe, and converting it into a 
practicall}^ illiterate industrial proletariat. In doing this it is doing 
a something that, however different in spirit, differs from the slave 
trade of its early history only in the narrower gap between em- 
ployer and labo'rer. In the "colored" population America has al- 
ready ten million descendants of unassimilated and perhaps unas- 
similable labor immigrants. These people are not only half civilized 
and ignorant, but they have infected the white population about 
them with a kindred ignorance. For there can be no doubt that if 
an Englishman or Scotchman of the year 1500 were to return to 
earth and seek his most retrograde and decivilized descendants, he 
would find them at last among the white and colored population 
south of Washington. And I have a foreboding that in this mixed 
flood of workers that pours into America by the million today, in 
this torrent of ignorance, against which that heroic being, the 
schoolmarm,, battles at present all unaided by men, there is to be 
found the possibility of another dreadful separation of class and 
kind, a separation perhaps not so profound but far more universal. 
One sees the possibility of a rich industrial and mercantile aris- 
tocracy of western European origin, dominating a darker-haired, 
darker-eyed, uneducated proletariat from central and eastern Eu- 
rope. The immigrants are being given votes, I know, but that does 



426 READINGS IN ECONOMIC PROBLEMS 

not free them, it only enslaves the country. The negroes were 
given votes. 

These are all mitigations of the outlook, but still the dark 
shadow of disastrous possibility remains. The immigrant comes 
in to weaken and confuse the counsels of labor, to serve the pur- 
poses oi corruption, tO' complicate any economic and social develop- 
ment, above all to retard enormoush'- the development of that na- 
tional consciousness and will on which the hope of the future 
depends. 

230. The Economic Argument against Immigration. 

1!Y FRANK A. FETTER. 

The current objections to^ immigration are mainly based on the 
alleged evil effects to the political, social, and moral standards of 
the community. It is often asserted that present immigration is 
inferior in racial quality to that of the past. Whatever be the truth 
and error mingled in these views, we are not now discussing them. 
O'ur view is wholly impersonal and without race prejudice. If the 
present immigration were all of the Anglo-Saxon race, were able 
to speak, read, and write English, and had the same political senti- 
ments and capacities as the earlier population, the validity of our 
present conclusions would be unaffected. 

When our policy oi unrestricted immiigration is thus opposed 
to the interests of the mass of the people, its continuation in a 
democracy where universal manhood suffrage prevails is possible 
only because of a remarkable complexity of ideas, sentiments, and 
interests, neutralizing each other and paralyzing action. The Amer- 
ican sentiment in favor of the open door to the oppressed of all 
lands is a part of our national heritage. The wish to share with 
others the blessings of freedom and of economic plenty is the pro- 
duct of many generations of American experience. The policy had 
mainlv an economic basis ; land was here a free good on the margin 
of a vast frontier. Most citizens benefited by a growing population. 
But the open door policy is vain to relieve the condition of the 
masses of other lands. Emigration from overcrowded countries, 
with the rarest exceptions, leaves no permanent gaps. Natural in- 
crease quickly fills the ranks of an impoverished peasantry. Lands 
whose people are in economic misery must improve their own in- 
dustrial organization, elevate their standards of living, and limit 
their numbers. If they go on breeding multitudes which find an 
unhindered outlet in continuous migration to more fortunate lands. 



POPULATION AND IMMIGRATION 



427 



they can at last but drag others down to their own unhappy eco- 
nomic level. 

The pride of immigrants and of their children, sometimes to the 
second and third generations, is another strong force opposing re- 
striction. Immigrants; having become citizens, are proud of the 
race of their origin, and resent restriction as a reflection upon 
themselves and their people. 

A strong commercial motive operates in the most influential 
class of employers in favor of the continuance of immigration. 
From the beginning of our history, proprietors and employers have 
looked with friendly eyes upon the supplies of comparatively cheap 
labor coming from abroad. Large numbers of immigrants or of 
their children have been able soon, in the conditions of the times, to 
become proprietors and employers. Thus was hastened the peopling 
of the wilderness. The interest of these classes harmonized to a 
certain point with the public interest ; but likewise it was in some 
respects in conflict with the abiding welfare of the whole nation. 
It encouraged much defective immigration from Europe. 

The immigration from Europe has furnished an ever changing 
group of workers moderating the rate of wages which employers 
otherwise would have had to pay. The continual influx of cheap 
labor has aided in imparting values to all industrial opportunities. 
A large part of these gains have been in the trade, manufactures, 
and real estate of cities as these have taken and retained an ever 
growing share of the immigrants. Successive waves of immigration, 
composed of different races, have been ready to fill the ranks of the 
unskilled workers at meager wages. This continuous inflow has 
in many industries come to be looked upon as an indispensable 
part of the labor supply. Conditions of trade, methods of manufac- 
turing, prices, profits, and the capital value of the enterprises have 
become adjusted to the fact. Hence results one of those illusions 
cherished by the practical world when it identifies its own profits 
with the public welfare. Without immigration, it is said, the supply 
of labor would not be equal to the demand. It would not at the 
present wages. Supply and demand have reference to a certain 
price. At a higher wage the amount of labor offered and the 
amount demanded will come to an equality. This would tempor- 
arily curtail profits, and other prices would, after readjustment, be 
in a different ratio to wages. Such a prospect is most displeasing 
to the commercial world, quick to see disaster in a disturbance of 
profits, slow to see popular prosperity in rising wages. 

The labor supply coming from countries of denser population 



428 READINGS IN ECONOMIC PROBLEMS 

and with low standards of living creates, in some occupations, an 
abnormally low level of wages and prices. Children can not be 
born in American homes and raised on. the American standard of 
living cheaply enough to maintain at such low wages a continuous 
supply of laborers. Many industries and branches of industry^ in 
America are thus parasitical. A condition essentially pathological 
has come to be looked upon as normal. It is the commercial ideal 
which imposes itself upon the minds of men in other circles. 

What tremendous forces are combined in favor of a policy of 
unrestricted immigration : sentiment and business, generosity, self- 
ishness, laborers, employers. All men are prone to view immigra- 
tion in its details, not in its entirety. They see this or that indi- 
vidual or class advantage, not the larger national welfare. The in- 
terests oi capitalists and of the newly arriving immigrants are abun- 
dantly considered ; the interests of the mass of the people now here 
are overlooked. 

231. Resolutions against Immigration. 

BY UNITED GARMENT WORKERvS OE AMERICA. 

Resolved, That the unprecedented movement of the very poor 
to America from Europe in the last three years has resulted in 
wholly changing the previous social, political, and economic aspects 
of the immigration question. The enormous accessions to the ranks 
of our competing v/age- workers, being tO' a great extent unem- 
ployed, or only partly employed at uncertain wages, are lowering 
the standard of living among the masses of the working people of 
this country, without giving promise to uplift the great body of 
immigrants themselves. The overstocking of the labor market has 
become a menace to many trade-unions, especially those of the less 
skilled workers. Little or no benefit can possible accrue to an in- 
creasing proportion of the great numbers yet coming; they are 
unfitted to battle intelligently for their rights in this republic, to 
whose present burdens they but add others still greater. The fate 
of the majority of the foreign wage-workers now here has served 
to demonstrate on the largest possible scale that immigration is no 
solution of the world-wide problem of poverty. 

Resolved, That we warn the poor of the earth against coming 
to America with false hopes ; it is our duty to infomi them that the 
economic situation in this country is changing with the same rapid- 
ity as the methods of industry and commerce. 



POPULATION AND IMMIGRATION 429 

H. THE FURTHER RESTRICTION OF IMMIGRATION. 

232. Recommendations of the Immigration Commission. 

.\s a result of the investigation the Commission is of the opin- 
ion that in legislation emphasis should be laid on the following 
principles : 

1. While the American people welcome the oppressed of other 
lands, care should be taken that immigration be such in quantity 
and quality as not to make too difficult the process of assimilation. 

2. Further general legislation concerning the admission of im- 
migrants should be based primarily upon economic or business con- 
siderations touching the prosperity and economic well-being of our 
people. 

3. The measure of the healthy development of a country is not 
the extent of its investment of capital, its output of products, or 
its imports and exports, unless there is a corresponding economic 
opportunity afforded to the citizen dependent upon employment 
for his material, mental, and moral development. 

4. A slow expansion of industry which permits the adaptation 
and assimilation oi the incoming labor supply is preferable to a 
very rapid industrial expansion which results in the immigration 
of laborers of low standards and efficiency, who imperil the Amer- 
ican standard of wages and conditions of employment. 

The investigations of the Commission show an oversupply O'f 
unskilled labor in the basic industries of the country as a whole, 
and therefore demand legislation which will at the present time re- 
strict the further admission of such unskilled labor. It is desirable 
in making these restrictions that : 

a. A sufficient number be debarred to produce a marked effect 
upon the present supply of unskilled labor. 

b. The aliens excluded should be those who come to this coun- 
try with no intention to become American citizens, but merely to 
save and return to their own countr3^ 

c. The aliens excluded should be those who would least readily 
be assimilated. 

The following methods of restricting immigration have been 
suggested : 

a. The exclusion of those unable to read or write in some lan- 
guage. 



430 READINGS IN ECONOMIC PROBLEMS 

b. The limitation of the number of each race arriving each year 
to a certain percentage of the average of that race arriving during 
a given period of years. 

c. The exclusion of unskilled laborers unaccompanied by wives 
or families. 

d. The limitation oi the number of immigrants arriving an- 
nually at any port. 

e. The material increase in the amount of money required to 
be in the possession of the immigrant at the port of arrival. 

f. The material increase in the head tax. 

g. The levy of the head tax so as tO' make a marked discrim- 
ination in favor of m^en with families. 

A majority of the Commission favor the reading and writing 
test as the most feasible single method of restricting undesirable 
immigration. 

233. The Necessity for the Educational Test. 

BY P. ^. HALL.. 

If we are to apply some further method of selection to^ immi- 
grants what shall it be ? It must be a definite test. For one trouble 
with the present law is that it is soi vague and elastic that it can be 
interpreted to suit the temper of any of the higher officials who 
may happen tO' be charged with its execution. While there are 
ni'any exceptions, those persons who can not read in their own lan- 
guage are, in general, those who are also ignorant of a trade, who 
bring little money ^yith them, who- settle in the city slums, wdio 
have a low standard of living and little ambition to seek a better, 
and who do not assimilate rapidly or appreciate our institutions. It 
is not claimed that an illiteracy test is a test of moral character, 
but it would undoubtedly exclude a good many persons who now 
fill our prisons and almshouses, and would lessen the burden on 
our schools and machinery of justice. In a country having uni- 
versal suffrage, it is also- an indispensable requirement for citizen- 
ship, and citizenship in its broadest sense means much more than 
the right to the ballot. The illiteracy test has passed the Senate 
three times and the House four times in the last eight years. The 
test has already been adopted by the Commonwealth of Australia 
and by British Columbia, and w^ould certainly have been adopted 
here long since but for the opposition of the transportation com- 
panies. 



POPULATION AND IMMIGRATION 431 

234. Pauperism and the Illiteracy Test. 

BY KATE H. CLAGHORN. 

The general conclusion to^ be drawn, with regard to the newer 
elements in immigration seem to be, first, that among them the un- 
skilled worker gets along better than the skilled, and the illiterate 
than the literate. This is not to' say that skill and education in them- 
selves are a handicap in the industrial contest, or that all racial 
groups with a large proportion of illiterate, unskilled labor get along 
better than those having a high degree of literacy and a larger pro- 
portion O'f skill. 

Industrial success in this country depends upon adjustment to 
conditions here. Some groups seem to find suitable openings for 
skill and education. But on the whole there is more chance for the 
newcomer intO' any social aggregation if he is willing tO' begin at 
the bottoin, and in this country, in particular, there is less demand 
for skilled labor from outside, owing to- the fact that the present 
inhabitants are willing to follow these lines of work themselves, but 
are unwilling to occupy themselves in unskilled labor. On the other 
hand the skill, and especially the education, of the newer European 
immigrant has been directed along lines that do not suit American 
conditions. In the evolutionary phrasing, undifferentiated social 
elements can more easily adapt themselves, by specializing, to fit a 
new environment, than. can the elements which have been already 
differentiated to fit a former environment. 

Any restriction of immigration, then, that is based on an edu- 
cational qualification, would be meaningless with respect tO' the 
growth of pauperism. Such a qualification would, among the newer 
immigrants at least, let in the class which though small is the most 
difficult to provide for, and would keep out the class that can best 
provide for itself. 

235. A Threat to the American Farmer in Settling Immigrants 
in Rural Districts. 

BY ROBERT D. WARD. 

. To scatter among our rural communities large numbers of aliens 
whose standards of living are such that they are willing to work for 
the lowest poissible wage, is to expose our native farming popula- 
tion to a competition which is distinctly undesirable. In the com 
belt of the west, as Professor T. N. Carver has recently shown, the 
newer immigrants, because of their lower standards of living, have 
been able to put more money into land, buildings, and equipment, 



432 



READINGS IN ECONOMIC PROBLEMS 



than the native American farmer ; and hence have an advantage in 
the struggle for existence. Scattering our aHen population simply 
spreads more widely the evils which result from exposing our own 
people to competition with the lower class of foreigners. Even 
though Italians displace negroes in the agricultural districts of the 
South, the effect will undoubtedly be to cause a migration of the 
negroes to the cities, a result which those familiar with the condi- 
tions of the negroes now congested in cities can not fail to view 
with the greatest alarmi. Lastly, the more widely we scatter the 
newer immigrants, the more widespread will be the effect of the 
competition with the lower grades of aliens in causing a decrease 
in numbers among the older portion of our population. American 
fathers and mothers naturally shrink from exposing their sons and 
daughters tO' competition with those who are contented with lower 
wages and lower standards of living; and therefore the sons and 
daughters are never born. 

Even if the slum population should be distributed throughout 
the rural sections of the country, congestion in the slums could not 
be relieved, as long as the tide of new immigration flows on un- 
checked. Were it not for the continued influx of new immigrants, 
the problem of the slum burden would not exist. It is quite obvious 
that the more we try to reduce the pressure of competition among 
the alien immigrants in our great cities, the more we shall encour- 
age other immigrants, as ignorant and as poor, to come over and 
take the place vacated. Distribution and a reduction in the num- 
ber of our immigrants are both needed. 

236. Consular Inspection as a Method of Restriction. 

BY BROUGHTON BRANDENBURG. 

Immigration must be either controlled and directed or it must 
be abolished, and the last-named alternative is eliminated by com- 
mon sense and considerations of a humane nature. We need the 
immigrants. Our nation owes its strength today to those who have 
crossed the ocean in other years. Our great industries need their 
brawn, our undeveloped regions need their toil, and we can easily 
accept 1 50,000,000 more human beings as raw material ; but they 
must come as raw material, — good raw material. That given, our 
civic atmosphere, our conditions, our national spirit must do the 
rest, and patriots must look to the children of the immigrants for 
the results rather than to the immigrants themselves. 

Diseased, deformed, or physically insufficient persons are not 
and never can be good raw material, and should not be allowed to 



POPULATION AND IMMIGRATION 433. 

leave their homes, nor should any members of their families on 
whom .they are, or are likely to be, dependent. Convicts, prostitutes, 
persons engaged in questionable pursuits, anarchists, radical social- 
ists, and political agitators should be excluded. 

The true conditions of all such persons is readily ascertainable 
from the civic, police, and militars'' records in the communes of their 
residence, to which can be added the supplemental evidence of their 
neighbors and the local officials of the communes. In the com- 
]nunes of their nativity the truth is known and cannot be hidden. 
At the ports of embarkation combined influences can deceive the 
best officials. At the ports of arrival the hand of the inspector is 
still weaker. 

The conclusion is plain ; seek the grounds on which to deny 
passage to emigrants who wish to come to the United States in the 
villages from which they emanate. 

What seems to me to be the best plan to do this, to keep the 
expense below that which it is at present, and to avoid the oppor- 
tunities which are sure to be presented for wholesale corruption of 
American officials by the transportation interests and by the emi- 
grants themselves, is this : Select emigrants before itinerant boards 
of two, three, or more native-born Americans who speak fluently 
and understand thoroughly the language and dialects of the people 
who come before them, — these boards to be on a civil-service basis. 

The long diplomatic delays and ensuing red tape of incorporat- 
ing the privileges of these boards in treaties with the several Euro- 
pean governments can be avoided by temporary operation under 
the present consular system of the United States, and little objec- 
tion would be met with from an}' of the governments from whose 
domains the immigrants come. 

The sittings of the boards should be announced by advertise- 
ments a sufficient length of time in advance to allow all persons con- 
templating emigration to prepare to appear for examination. Ex- 
aminers should be prepared to furnish information as to destinations 
and opportunities, and could, with care, prevent an increase of the 
congestion in the cities of the East. In extremity, regulations could 
be made which would allow them to deny clearance and passage to 
persons desirous of going to districts already over-populated with 
aliens. 

It is easy to see how these visiting boards could promote emigra- 
tion among the classes which are most desirable in northern and 
central Europe, and are now so chary of coming-. Families which 
have something to lose by being turned back from the United States 
are loath to dispose of their property and make the venture. If 



434 READINGS IN ECONOMIC PROBLEMS 

they knew they were certain of admission before they left their 
homes, a year's time would see the level of the grade of emigrants 
greatly elevated. 

Deportation is the severest punishment which can fall on an 
alien in comparison with anything less than a several years' impris- 
onment, and all admissions to the country should be made proba- 
tionary; the commission of any crime or crimes, and conviction 
therefor, to be followed by punishment and then by deportation. 
Many of the minor crimes committed by aliens are done with the 
intention of getting two or three years in prison in which to learn 
to read and write English and acquire a trade. 



IX. 
THE LABOR PROBLEM. 

A. THE VIEW-POINTS OF LABORER AND CAPITALIST. 
237. The Sons of Martha. 

BY RUDYARD KIPUNC. 

The Sons of Mary seldom bother, for they have inherited that good 

. part, 
But the Sons of Martha favor their mother of the careful soul and 

the troubled heart ; 
And because she lost her temper once, and because she was rude 

to the Lord, her guest. 
Her sons must wait upon Mary's sons — world without end, reprieve 

or rest. 

It is their care in all the ages to take the buffet and cushion the 

shock ; 
It is their care that the gear engages, it is their care that the switches 

lock: 
It is their care that wheels run truly; it is their care to embark 

and entrain. 
Tally, transport, and deliver duly the Sons of Mary by land and 

main. 

They say to the mountain, "Be ye removed !" They say to the lesser 

floods, "Run dry!" 
Under their rods are the rocks reproved — they are not afraid of 

that which is nigh. 
Then do the hilltops shake to the summit; then is the bed of the 

deep laid bare. 
That the Sons of Mary may overcome it, pleasantly sleeping and 

unaware. 

They finger Death at their glove's end when they piece and repiece 

the living wires; 
. He rears against the gates they tend ; they feed him hungry behind 

their fires. 
Early at dawn ere men see clear they stumble into his terrible stall, 
And bait him forth like a haltered steer and goad and turn him till 

evenfall. 



436 READINGS IN ECONOMIC PROBLEMS 

To these from birth is beHef forbidden ; from these till death is 

relief afar — 
The}' are concerned with matters hidden — under the earth line their 

altars are: 
The secret fountains to follow up, waters withdrawn to restore to 

the mouth, 
Yea, and gather the floods as in a cup, and pour them ag^ain at a 

city's drouth. 

They do not preach that their God will rouse them a little before the 

nuts work loose; 
They do not teach that His Pity allows them to leave their work 

whenever they choose. 
As in the thronged and lig-htened ways, so in the dark and the desert 

they stand. 
Wary and watchful all their days, that their brethren's days may be 

long in the land. 

Lift ve the stone, or cleave the wood, to make a path more fair or 

flat, 
Lo ! it is black already with the blood Sons of Martha spilled for 

that. 
Not as a ladder from earth to heaven, not as an altar to any creed. 
But simple service, simply given to his own kind, is their common 

need. 

And the Sons of Mary smile and are blessed — they know the angels 

are on their side ; 
They know in them is the grace confessed, and for them are the 

mercies multiplied ; 
They sit at the feet and they hear the word — they know how truly 

the promise runs ; 
They have cast their burden upon the Lord — and the Lord, He lays 

it on Martha's sons. 

238. The View-Point of the Laborer. 

BY ROBERT l'\ HOXIE. 

Among the main charges brought against the unionist by the 
employer are these : first, that he refuses to recognize the generally 
conceded rights of the employing class ; secondly, that he does not 
recognize the sacredness of contract ; thirdly, that while he is strug- 
gling to obtain higher wages and shorter hours of work, he per- 
sistently attempts to reduce the efficiency of labor and the extent 



LABOR PROBLEMS 437 

of the output. Assuming these charges to be substantially correct, 
let us in the case of each seek without prejudice to discover the 
real grounds of the laborer's attitude and actioii. 

I. The "rights" which the employer claims, and which the 
unionist is supposed to^ deny, may perhaps be summarily expressed 
in the phrase, "the right of the employer to manage his own busi- 
ness." To' the employer it is a common-sense proposition that his 
business is his own. To him this is not a subject of argument. It 
is a plain matter of fact and carries with it the obvious rights of 
management unhampered by tlie authority of outside individuals. 
But tO' the laborer it is different. 

The laborer, like all the rest of us, is the product of heredity 
and environment. That is to say, he is not rational in the sense 
that his response to any given mental stimulus is invariable. On 
the contrary, like the rest of us, he is a bundle of notions, preju- 
dices, beliefs, unconscious preconceptions and postulates, the pro- 
duct of his peculiar heredity and environment. These unconscious 
and subc'onscious psychic elements necessarily mix with and color 
his immediate activity. What is or has been outside his ancestral 
and personal environment must be either altogether incomprehen- 
sible to- himi, or else must be conceived as cjuite like or analogous 
to that which has already been mentally assimilated. He cannot 
comprehend what he has not experienced. 

Now, it is well known that the environment of the laborer 
under the modern capitalistic system has tended to become predom- 
inantly one of physical force. He has been practically cut oft" from 
all knowledge of market and managerial activities. The ideals, 
motives, and cares of property-ownership are becoming foreign 
to him. More and more, in his world, spiritual forces are giving 
way to the apparent government and sanction of blind physical 
causation. In the factory and the mine spiritual, ethical, custo- 
mary, and legal forces and authorities are altogether in the back- 
ground. Everything to the worker, even his own activity, is the 
outcome of physical force, apparently undirected and unchecked 
by the spiritual element. The blast shatters the rock, and whatever 
of flesh and blood is in range is also torn in pieces. The presence 
and the majesty of the law and contract are altogether ineffective 
in the face of physical forces let loose by the explosion. In like 
manner the knife cuts, the weight crushes, the wheel mangles the 
man and the material with equal inevitableness. No sanction, re- 
ligious, moral, customar}^, or legal, is there. Even outside the 
strictly mechanical occupations the machine and the machine pro- 
cess are coming to- dominate the worker, and the growth in size 



438 READINGS IN ECONOMIC PROBLEMS 

of the industrial unit renders his economic relationships ever more 
impersonal — withdraws farther from his knowledge the directing; 
and controlling spiritual forces. The laborer thus environed in- 
evitably tends to look upon physical force as the only efficient cause 
and the only legitimizing sanction. He tends to become mentally 
blind to spiritual, legal, contractual, and customary forces and their 
effects. 

To the laborer, as the product of this environment, the pro- 
prietary and managerial claims of the employer tend to become, of 
necessity, simply incomprehensible. The only kind of production 
which he can recognize is the material outcome of physical force^ — 
the physical good. Value unattached to and incomm<ensurable with 
the physical product or means of production is to him merely an in- 
vention of the employing class to cover up unjust appropriation. 
He knows and can know nothing about the capitalized value of 
managerial ability or market connections. To him, then, the im- 
portant point is: By what physical force are these things made 
what they are? It is a matter of simple observation that' the em- 
ployer exerts no direct or appreciable physical force in connection 
with the productive process. Therefore, in the eyes of the laborer, 
he simply cannot have any natural rights of proprietorship and 
management based on productive activity. 

In the same way all other grounds on which ownership and the 
managerial rights of the employer are based have become incon- 
clusive to the laborer. Appropriation, gift, inheritance, saving, con- 
tract, in themselves do not produce any physical effect on the only 
goods which he can recognize. Therefore they cannot be used to 
prove property in any just or natural sense. They hold in practice 
simpily because back of them is the physical force of the police 
and army established and maintained by the middle class to protect 
its proprietary usurpations. Thus the whole claim of the em- 
ployer to the right to manage his own business to suit himself 
has become and is becoming in a way incomprehensible to the 
laborer on grounds of natural equity. At the same time, by virtue 
of habit and the sanction of physical force as a productive agent, he 
sees himself ever more clearly the rightful proprietor of his job and 
of the products of it. All this is the natural and inevitable ontcome 
of the conditions under which he lives and toils. 

2. The unionist laborer does not recognize the sacredness of 
contract. This is, if anything, a more serious charge than the pre- 
ceding one. 

As a matter of fact, the laborer is sO' circumstanced that obli- 
gations of contract with the employer must appear secondary in im- 



LABOR PROBLEMS 439 

portance to his obligations to fellow-workers. This is not difficult 
to show. Ever since the establishment of the money-wage system:, 
the everyday experience oi the laborer has been teaching him the 
supreme importance of mutuality in his relations with his immediate 
fellow-workers. The money payment, related not to the physical 
result of his efforts, but to- its economic importance, has been blot- 
ting out for him any direct connection between effort and reward. 
Experience has taught him to^ look upon his labor as one thing in 
its effects and another thing in its reward. As a thing tO' be re- 
warded he has learned to consider it a commodity in the market. 
As such he knows that it is paid for at competitive rates. He has 
learned that, if he undercuts his fellow, prompt retaliation follows, 
to the detriment of both, and he has learned that combination with 
his fellow results in better immediate conditions for both. 

The worker does not, of course, look far beyond the immediate 
results. In severing the obvious connection between his task and 
the complete product, in removing from him all knowledge of the 
general conduct and condition of the business, in paying to him 
a fixed wage regardless of the outcome of the particular venture, 
and in paying him a wage never much in excess of his habitual 
standard of living, the factory and wage system have accustomed 
him to a hand-to-mouth existence, have barred him from all the 
training effects of property-ownership, and have atrophied his 
faculties of responsibility and foresight. Moreover, it is not to be 
expected that today's empty stomach will be comforted by tomor- 
row's hypothetical bread, least of all by bread which is likely to 
comfort the stomach of another. Is it any wonder, then, that the 
laborer does not and that he cannot follow the economist in his 
complicated arguments to^ prove that, in the long run and on the 
w'hole, the keenest competition among laborers brings the highest 
rewards ? 

Proneness tO' breach of contract, therefore, is seen to be a na- 
tural and evitable outcome of his life and working conditions. 

3. The third charge against the unionist which we have under- 
taken to examine states that while he is struggling for increase 
of wages he is at the same time attempting to reduce the efficiency 
of labor and the amount of the output. In other words, while he 
is calling upon the employer for more of the means of life he is 
doing much to block the efforts of the employer to increase those 
means. 

There is no doubt that this charge is to a great extent true. In 
reasoning upon this matter the employer, viewing competitive so- 
ciety as a whole, assumes that actual or prospective increase in the 



440 



READINGS IN ECONOMIC PROBLEMS 



goods" output means the bidding-up of wages by employers anxious 
to invest profitably increasing social income. It follows that in 
competitive society laborers as a whole stand to gain with im- 
provements in industrial effort and process. In the case of the in- 
dividual competitive establishment it is clear that the maximum 
income is ordinarily to be soiight in the highest possible efficiency, 
resulting in increased industrial output. At least this is true where 
there are numerous establishments of fairly equal capacity pro- 
ducing competitively from the same market. Under such circum- 
stances the increased output of any one establishment due to "speed- 
ing up" will ordinarily have but a slight, if any, appreciable effect on 
price. Each individual entrepreneur, therefore, is justified in as- 
suming a fixed price for his product and in reckoning on increase 
of income from increase of efficiency and industrial product. Ap- 
parently it rarely occurs to the employer that this analysis is not 
complete. Having assumed that definite laws determine the man- 
ner in which income is shared among the productive factors, he 
apparently concludes, somewhat naively, that just as the laborers 
in society Avill in the aggregate profit by increase in the social in- 
come, so also will the laborers in any individual establishment profit 
by increase in its income. 

To this mode of reasoning, and to the conclusions reached 
through it, the unionist takes very decided exceptions. To the 
statement that labor as a whole stands to gain through any increase 
in the social dividend he returns the obvious answer that labor as a 
whole is a mere academic conception ; that labor as a whole may 
gain while the individual laborer starves. His concern is with his 
own wage-rate and that of his immediate fellow- workers. He has 
learned the lesson of co-operation within his trade, but he is not 
yet class-conscious. In answer to the argument based on the in- 
dividual competitive establishment he asserts that the conditions 
which determine the income of the establishment are not the same 
as those which govern the wage-rate. Consecjuently, increase in the 
income of the establishment is nO' guarantee oi increase of the 
wage-rate of the worker in it. Conversely, increase in the wage- 
rate may occur without increase in the income of the establishment. 
Indeed, in consequence of this non-identity of the conditions gov- 
erning establishment income and wage-rate, increase in the gross 
income of the establishment is often accompanied by decrease in 
the wage-rate, and the wage-rate is often increased by means which 
positively decrease the gross income of the establishment. 

The laborer's statements in this instance are without doubt well 
founded. The clue to the whole situation is, of course, found in 



LABOR PROBLEMS 441 

the fact that the wage-rate of any class of laborers is not determined 
by the conditions which exist in the particular establishment in 
which they work, but by the conditions which prevail in their trade 
or "non-competing group." With this •commonplace economic argu- 
ment in mind, the reasonableness of the unionist's opposition to 
speeding up, and of his persistent efforts to hamper production, at 
once appears. 

239. Two Declarations of Faith. 

BY THE. NATlONAIv ASSOCIATION OF MANUI'ACTURERS. 

a) An Economic Creed. 

The National Association of Manufacturers of the United States 
of America does hereby declare that the following principles shall 
govern the Association in its work in connection with the problems 
of labor: 

1. Fair dealing is the fundamental and basic principle on 
which relations between employes and employers should rest. 

2. The National Association of Manufacturers is not opposed 
to organizations of labor as such, but it is unalterably opposed to 
boycotts, black-lists and other illegal acts of interference with the 
personal liberty of employer and employe. 

3. No person should be refused employment or in any way 
discriminated against on account of membership or non-membership 
in any labor organization, and there should be no discriminating 
against or interference with any employe who is not a member 
of a labor organization by members of such organizations. 

4. With due regard to contracts, it is the right of the employe 
to leave his employment whenever he sees fit, and it is the right of 
the employer tO' discharge any employe when he sees fit. 

5. Employers must be free tO' employ their work people at 
wages mutually satisfactory, without interference or dictation on 
the part of individuals or organizations not directly parties to^ such 
contracts. 

6. Employers must be unmolested and unhampered in the 
management of their business, in determining the amount and 
quality of their product, and in the use of any methods or systems 
of pay which are just and equitable. 

7. In the interest of employes and employers of the country, 
no limitation should be placed upon the opportunities of any person 
to learn any trade to which he or she may be adapted. 

8. The National Association of Manufacturers disapproves ab- 
solutely of strikes and lock-outs, and favors an equitable adjust- 



442 



READINGS IN ECONOMIC PROBLEMS 



ment of all differences between employers and employes by any 
amicable method that will preserve the rights of both parties. 

9. Employes have the right to contract for their services in a 
collective capacity, but any contract that contains a stipulation that 
employment should be denied to men not parties to the contract 
is an invasion of the constitutional rights of the American work- 
man, is against public policy, and is in violation of the conspiracy 
laws. This Association declares its unalterable antagonism to the 
closed shop and insists that the doors of no industry be closed 
against American workmen because of their membership or non- 
membership in any labor organization. 

10. The National Association of Manufacturers pledges itself 
to oppose any and all legislation not in accord with the foregoing 
declaration. 

b) A Political Creed. 

Adopted at the eighteenth annual convention of the National 
Association of Manufacturers, Detroit, Michigan, May 21, 191 3. 
The Detroit News Tribune, May 22, 1913. 

Whereas, The National Association of Manufacturers, in con- 
vention assembled in New Orleans, in 1903, adopted, declared and 
promulgated certain principles governing the work of the associ- 
ation in connection with problems of labor; and 

Whereas, The past decade has demonstrated the truth of these 
declared principles ; and 

Whereas, During the past ten years new and different problems 
have also emerged, affecting our governmental, economic and in- 
dustrial society, upon which we deem it our duty at this time to 
express our attitude and stand ; therefore 

Resolved, That in addition to the principles heretofore enunci- 
ated and declared at our convention in New Orleans in 1903, we. in 
convention assembled, declare and promulgate, in addition, the fol- 
lowing declaration of principles : 

First. We hold that the inherent powers of our courts of equity 
shall not be abridged in the issuance of injunctions in labor dis- 
putes. 

Second. We hold that the power vested in our courts to punish 
for contempt of court should not be abridged by the granting of 
jury trial for contempt. 

Third. We protest against class legislation, whether enacted by 
state legislatures or congress, and we assert that all forms of class 
legislation are un-American and detrimental tO' our common good. 



LABOR PROBLEMS 443 

Fourth. We pledge our loyalty to our judiciary, upon the main- 
tenance of which, unswerved by passing clamor, rests the perpetu- 
ation of our laws, our institutions and our society. 

Fifth. We favor the further enactment of equitable, beneficial, 
and simplified workingmen's compensation legislation. 

Sixth. We denounce the subserviency of representatives of the 
whole people to the dictation of any class legislation. 

Seventh. We affirm, in the light of proven facts, that any com- 
promise, toleration, or identification with the leaders of criminal 
unionism will stultify our liberties and weaken respect for our laws 
and their just enforcement. 

Eighth. We affirm onr approval of the enactment of wise and 
just lawS; necessary to improve conditions of labor. 

Ninth. We affirm that our tested, self-controlled, representative 
democracy is adequate, under our consitutional guarantees, to ef- 
fectuate the real needs and purposes of our national life. 

Tenth. We pledge ourself towards the accomplishment of the 
spirit and purpose of the foregoing. 



B. THE NATURE OF THE LABOR PROBLEM. 
240. Fundamental Factors in the Problem. 

BY T. S. ADAMS AND H. h. SUMNER. 

In a very general and abstract sense there is such a thing as 
the labor problem, which may be defined as the problem of improv- 
ing the^ conditions oi employment of the wage-earning class. The 
simplicity of definition is largely verbal. When we begin to study 
the problem it divides up into a number of dififerent problems. It 
is true, nevertheless, that most important labor problems have their 
roots in three or four great social institutions. 

First of all is the wage systeirt itself. Under it the laborer takes 
upon himself the responsibility of securing work and of supporting 
himself and his family. More iimportant still, he must do^ this by 
selling his services to^ the great masters of industr}'. He has be- 
come not only a producer but a merchant as well. He must acquire 
a certain strength and skill and sell it to the best advantage. The 
system compels him to take his chances and stake his welfare upon 
successful bargaining in the labor market. 

Second in order is the highly capitalized form of modern indus- 
try. The introduction of the capitalistic system has been followed 



444 



READINGS IN ECONOMIC PROBLEMS 



by great progress in many ways, such as a general increase in 
wages and a rapid elevation of the standards of life and of com- 
fort. But the factory system itself is directly responsible in a large 
degree for many labor problems — ^child labor, industrial accidents, 
factory regulation, unemployment resulting from the invention of 
labor-saving machinery, and like evils. 

Then there is the relative permanence of the wage-earner in the 
laboring class. The great majority of men do nof possess the abilities 
or the opportunities to secure the large capital necessary for the 
successful conduct of a modern business. For the masses it is 
increasingly true that once a wage-earner always a wage-earner. 
The permanency of status makes the labor problem in oiie respect a 
class struggle. The laborer feels that he is permanently held within 
a class who'Se interests are, in part, antagonistic to those of the 
employers with whom he bargains and higgles over wages. To 
some it seems that the increasing complexity of industry has outrun 
human ability, leaving a smaller and smaller proportion of men 
who are fitted to direct and control. Others explain the phenom- 
enon by asserting that, owing to a mechanical tendency towards 
centralization, a decreasing proportion of the men have the ex- 
ceptional means and opportunities to rise to industrial independence. 
Whatever the explanation, there can be no doubt of the fact that 
the ultimate control of industry is passing into relatively fewer and 
fewer hands, with the result that the power and wealth of the few 
who do reach the top are enormousily swelled. 

These, then, are what may be called the fundamental factors of 
the modern labor problem, — the wage system, the permanent status 
of the wage-earning class, the factory system — wnth all which that 
implies, and the extreme concentration and control of wealth in 
the hands of a very small proportion of the population. 

241. The Historical Basis of Trade Unionism. 

BY SIDNEY AND BEATRICE: WEBB. 

The Trade Union arose, not from any particular institution, 
but from every opportunity for the meeting together of wage- 
earners of the same trade. Adam Smith remarked that ''people of 
the same trade seldom meet together, even for merriment and di- 
version, but the conversation ends in a conspiracy against the pub- 
lic, or in some contrivance to raise prices." And there is actual 
evidence of the rise of one of the oldest Trade Unions out of a 
gathering of the journeymen "to take a .social pint of porter to- 
gether." More often it is a tumultuous strike out of which grows 



LABOR PROBLEMS 



445 



a permanent OTg'anization. Instances are on record in which a 
number of laborers who have become accustomed to visit public 
houses have become the nucleus of organization. More than once 
the journeymen in a particular trade declared that, "It has been an 
ancient custom in the kingdom of Great Britain for divers Artists 
to meet together and unite themselves intO' societies to promote 
Amity and true Christian Charity,'' and estaiblished a sick and 
funeral club, which invariably has proceeded to discuss the rate 
of wages, and insensibly has passed into a trade union with friendly 
benefits. And if the trade is one in which the members travel the 
result has been a National Trade Union. 

But this does not explain why the continuous organizations of 
wage-workers came as late as the eighteenth century ? The essen- 
tial cause of this was the revolution in industry which came at 
this time. When such unions arose, the great mass of the work- 
ers had ceased tO' be independent producers, and had passed into 
the condition of life-long wage-earners. Such unions came after 
''the definite separation between the functions of the capitalist and 
the workman, or between the direction of industrial operations and 
their execution in detail."" 

It is often assumed that the divorce of the manual worker from 
the ownership of his tools resulted from the introduction of ma- 
chinery and the factory system. Were this true, we should not find 
Trade Unions earlier than factories. Yet such combinations in 
England proceeded the factory system by half a century, and oc- 
cured in trades carried on exclusively by hand labor. Some crafts 
lent themselves to an advantageous division of labor. Among these 
there is particularly to be mentioned that of tailoring. Because of 
the special skill required for tailoring for rich customers, the most 
proficient tailors were separated from the rest of the journeymen, 
and became practically a separate social class. This differentiation 
was promoted bv the increasing need of capital for successfully 
beginning business in the better quarters of the metropolis. By 
1700 we find the typical journeyman tailor in London a lifelong 
wage-worker. It is not surprising, therefore, that one of the earl- 
iest instances of permanent Trade Unionism occurred in that trade. 
Another instance is that of the Avoolen workers in the AVest of 
England. Again, it is not peculiar that in the year 1790 the Shef- 
field emplovers found themselves obliged to take concerted action 
against the "scissors-grinders and other workmen who have en- 
tered into unlawful combinations to raise the price of labor." But 
the cardinal examples of the connection of Trade Unionism with 
the divorce of the worker from the instruments of production is 



446 READINGS IN ECONOMIC PROBLEMS 

seen in the rapid rise O'f trade combinations on the introduction of 
the factor}^ system. 

It is easy to understand how the massing together in factories 
of regiments of men, all engaged in the same trade, facilitated and 
promoted the formation of workmen's societies. But the rise of 
permanent trade combinations is to^ be ascribed to the definite separ- 
ation between the functions of the capitalist entrepreneur and the 
manual worker. It has become a commonplace of Trade Unionism 
that only in those industries in which the worker has ceased to be 
concerned in the profits oi buying and selling can effective and 
stable trade organizations be maintained. 

242. The Organization of the Ill-Paid Classes. 

BY CHARLES H. COOLEY. 

It is quite apparent that an organized and intelligent class-con- 
sciousness in the hand-working people is one of the primary needs 
of a democratic society. In so far as this part of the people is 
lacking in a knowledge of its situation and in the practice of or- 
derly self-assertion, a real freedom will also be lacking, and we 
shall have some kind of subjection in its place; freedom being im- 
possible without group organization. That industrial classes exist 
cannot be well denied, and existing they ought to be conscious and 
self-directing. 

The most obvious need of class-consciousness is for self-asser- 
tion against the pressure of other classes, and this is both most 
necessary and most difficult with those whO' lack wealth and the 
command over organized forces. which it implies. In a free society, 
especially, the Lord helps those who help themselves ; and those 
who are weak in money must be strong in union, and must also 
exert themselves to make good any deficiency in leadership that 
comes from ability deserting to more favored classes. 

That the dominant power of wealth has an oppressive action, 
for the most part involuntary, upon the people below, will hardly 
be denied by any competent student. The industrial progress of 
our time is accoinpanied by sufferings that are involved with the 
progress. These sufferings fall mostly upon the poorer classes, 
while the rich get a larger share of the increased product which 
the progress brings. 

Labor unions have arisen out of the urgent need of self-defence, 
not so much against deliberate aggression as against brutal con- 
fusion and neglect. The industrial population has been tossed 
about on the swirl of economic change like sO' much sawdust on a 



LABOR PROBLEMS 



447 



river, sometimes prosperous, sometimes miserable, never secure, 
and living largely under degrading, inhuman conditions. Against 
this state of things the higher class of artisans have made a partly 
successful struggle through co-operation in associations, which, 
however, include much less than half of those who might be ex- 
pected to take advantage of them. That they are an effective 
means of class self-assertion is evident from the antagonism they 
have aroused. 

Besides their primary function of group-bargaining, unions are 
performing a variety of services hardly less important to their mem- 
bers and toi society. In the way of influencing legislation they have 
probably done more than all other agencies together to combat 
child-labor, excessive hours, and other inhuman and degrading 
kinds of work, also- to provide for safeguards against accident, for 
proper sanitation, for factories and the like. In this field their 
work is as much defensive as aggressive, since employing interests, 
on the other side, are constantly influencing legislation and admin- 
istration to their own advantage. 

Their functions as spheres of fellowship and self-development 
is equally vital and less understood. To' have a we-feeling, to live 
shoulder to shoulder with one's fellows, is the only human life; 
we all need it to keep us from selfishness, sensuality, and despair, 
and the hand-worker needs it even more than the rest of us. Usu- 
ally without pecuniary resources and insecure of his job and his 
home, he is, in isolation, miserably weak and in a way to be cowed. 
The imion makes him a part of a whole, one of a fellowship. More- 
over, the life of labor unions and other class associations, through 
the training which it gives in democratic organizations and dis- 
cipline, is perhaps the chief guarantee of the healthy pohtical devel- 
opment of the handworking class. That their members get this 
training will be evident tO' anyone who studies their working, and 
it is not apparent that they would get it in any other way. 

In general no sort of persons mean better than hand-laboring 
men. They are simple, honest people, as a rule, with that bent to- 
word integrity which is fostered by working in wood and iron and 
often lost in the subtleties of business. Moreover, their experience 
is such as to develop a sense of the brotherhood of man and a 
desire to realize it in institutions. Not having enjoyed the artificial 
support of accumulated property, they have the more reason to 
know the dependence of each on his fellows. Occasionally out- 
breaks of violence a.larm us and call for prompt enforcement of 
law, but are not a serious menace to society, because general senti- 
ment and all established interests are against them ; while the subtle, 



-448 READINGS IN ECONOMIC PROBLEMS 

respectable, systematic corruption by the rich and powerful threat- 
ens the very being of democracy. 

The most deplorable fact about labor unions is that they em- 
brace so small a proportion of those who- need their benefits. How 
far into the shifting masses of unskilled labor effective organization 
can extend only time will show. 



C. MACHINERY AND THE LABORER. 

243. The Attitude of the Laborer towards Machinery. 

The following excerpts, taken from various sources, indicate 
various attitudes of the laborer towards the introduction of ma- 
chinery : 

Machinery has done the work. Machinery has left them in rags 
and without any wages at all. Machinery has crowded them in 
cellars, has immured them in prisons worse than Parisian bastiles, 
has forced them from their country to seek in other lands the 
bread denied to them here. I look upon all improvemients which 
tend to lessen the demand for human labor as the deadliest curse 
that could possibly fall on the heads of our working classes, and T 
hold it to be the duty of every working potter — the highest duty — 
to obstruct by all legal means the introduction of the scourge into 
any branch of his trade. 

Some of the fast American presses introduced into this country 
have actually been thrown out of order because of the unwilling- 
ness of the men to work them at the rate for which they are de- 
signed. There can, however, hardly be any particular prejudice 
against these "American" machines as such, because, though de- 
signed in the United vStates, they are now built in England from 
English materials by English workmen, and these English-made 
machines are declared to be better made and capable of quicker 
running then those constructed in America. Obviously the real 
motive of the printers is to "leave work for someone else." 

In the working of all machinery used in conjunction with the 
curriers trade, preference shall be given to curriers. Apprentices 
to the curriers' trade shall be taught to use the machines. 

It is the manufacturer's right tO' introduce whatever machinery 
his business may require and to divide and subdivide labor in any 
way he may deem necessary, subject to the payment of wages in 
the rules hereinafter set forth. 



LABOR PROBLEMS 



449 



It is true that objection does not take the form of dire refusal 
to work with the machines ; experience has taught the union a more 
direct way of marshaHng the forces of opposition. To say openly 
that labor-saving devices were objected to would be to estrange 
that public sympathy without which Trade Unionismi finds itself 
unable to live. So other methods are adopted. The work done by 
the machines is belittled ; it is urged that no saving of labor is 
effected by their use ; the men working the machines exercise all 
their ingenuity in making machine work as expensive as hand- 
work. The unions are engaged in a gigantic conspiracy tO' hinder 
and retard the development of labor-saving appliances. If laborers 
run a machine for five minutes at full speed, they seem to think 
that it is necessary to stop it, and see that nO' breakage has occurred. 
Then they walk about the shop and borrow an oil can wherewith 
to do some totally unnecessary thing. No man dares do the best 
he can, lest his fellow-workmen should be, as he foolishly thinks, in- 
jured. It seems to be a settled policy with the men to- keep the cost 
of production as high as possible. 

244. An Explanation of the Laborer's Attitude. 

BY HENRY WHITER. 

Many see in labor-saving inventions some malign purpose, 
others a beneficient means for bettering the lot of all mankind. But 
the laborer thrown out of work by a machine cannot be expected 
to appreciate the beneficence of such economy. His horizon is lim- 
ited to his own means of livelihood. When a person finds his occu- 
pation gone, it outweighs all other considerations ; and, unmindful 
of the benefits which he may have received from similar economies 
in other trades, inventions to him seem a curse. The rewards of 
the particular invention which distresses him go tO' the body of 
consumers and he only shares indirectly as one of them. In the 
case of the wage-workers the gain is not evident, as it is with the 
manufacturer who first utilizes the invention. 

During the transition from the domestic to the factory system 
in England, machinery became a club to subjugate the laborer. Un- 
tutored, unorganized, without any resisting power, the former in- 
dependent artisan, now a factory hand, was placed in brutal com^ 
petition with his fellows, and every invention only served to add 
to his helplessness. The plight of the English laborers at that 
time abundantly shows that there are circumstances in which the 
wealth of a nation may increase tremendously, the productive power 



450 



READINGS IN ECONOMIC PROBLEMS 



of labor multiply many fold, while the workers become impoverished 
and brutalized. 

The actual injury done by machinery is caused by the sudden- 
ness of the changes that result. Since there could be no way of 
regulating inventive genius, and the incentives for using improve- 
ments will remain great, the rational and only way to meet them 
is by preparation. The laboring class suffers most because it is 
least able to accommodate itself to new situations. The remedy 
is in equipping the rising generation with a better knowledge of 
mechanics, and teaching it how to handle tools with skill. The 
result would be to increase the independence and adaptability of the 
workman. 

Machinery certainly has enlarged the capacities of the people and 
multiplied their opportunities. It is the agency which alone can 
raise wages, reduce the working time, and enhance the buying 
power of money. The feeling against machinery will not cease 
until the workman profits more directly as a producer as well as 
a consumer from its introduction, until he is treated as a human 
being and not as a mere animated tool, until he becomes more than 
a mere incident in production. 

245. The Laborer and the Machine. 

BY JOHN GRAHAM BROOKS. 

On the part of labor it is tO' be noted that there is no objection 
to machinery as machinery. The objection is to its individual own- 
ership. 

Emerson says that manhood has been shrunk and belittled by 
machinery. "The robust rurad Saxon degenerates in the mills to 
the Leicester stockinger, to the imbecile Manchester spinner — far 
on the way tO' be spiders and needles. The incessant repetition of 
the same hand-work dwarfs the man, robs him of his strength, wit, 
and versatility, to make a pin-polisher, a buckle-miaker, or any other 
speciality;" Ruskin, in a style brilliant as fire, preached against the 
"wheels" of progress for forty years. Morris begins the prologue 
to the "Earthly Paradise" with the words : 

Forget six counties overhung with smoke. 
Forget the snorting steam and piston stroke, 
Forget the spreading of the hideous town. 

To comfortable people generally this cry of the workman 
against machinery is a plain imbecility. "Does he know his interest 
so little as to object to a labor-saving contrivance? Does it not 



LABOR PROBLEMS 451 

heap up the product out of which his wages and well-being come? 
There is, of course, great inconvenience now and then to the in- 
dividual, but it is merely incidental. You laborers must trust to 
the 'long run.' The machinery that throws you out, or cuts your 
wages, makes more work here or elsewhere. The thing it makes 
falls in price, which is but another way of raising your wages." 
It was thought that labor should be docile after this expilanatioii of. 
the distant and ultimate good which machinery brings. But the 
race of hand-to-mouth workmen that would be satisfied with such 
advice is, happily, not yet born. Only a rare few, even among 
business men, act upon the "long run" motive. The average em- 
ployer is coiucerned with the profits of the next six months, i. e. 
with "the short run." The uncertainties about tariff changes, about 
the pressure of competition, often make this the only practicable 
course to follow. The trade unioris are only copying the employers 
when they reply : "We cannot postpone our share until years of 
time bring, if they do bring, cheaper products. The employer may 
be able — aided by patent laws — to keep all the good to himself for 
years. We have a right to every good that organization can give 
us at the time." 

Better than all outside advisers, labor has known the dangers 
which threatened it. It has watched the troop of women and chil- 
dren pouring in as competitors among the men. It saw that these 
were taken solely because they would work for less. In this country 
labor soon learned that machine industries demand a "reserve 
army." Then, if business presses, workmen are at hand; when it 
slackens, they can be turned ofif. 

Where machinery has brought high and quick profits, it has 
put a premium upon every form of cheaper labor — woman, child, 
and immigrant. This it is which has introduced among the labor- 
ers a competition as merciless as any that employing capitalists be- 
wail among themselves. To press the "long run" view upon the 
laborer, under these conditions, is to< assume an innocence that he 
did not possess even twoi generations ago. 

Froin, the larger social point of view it is very simple to show 
the error into which the workman fell. If machinery were upon 
the whole robbing him of work, then a relatively smaller part of 
our population must, decade by decade, be occupied with machinery. 
Every investigator knows that the exact opposite of this is true. 
There is no decade since 1850 in which it cannot be shown that 
machinery has set a larger and larger proportion of people to- work. 



452 READINGS IN ECONOMIC PROBLEMS 

The proportion of those earning a livelihood directly by the help of 
machinery was never so great as at the present moment. 

It is seen that hundreds are thrust aside, it is less easily seen 
that masses are set to- work. One has only to analyze the indirect 
services which invention creates to admit the force of this. Upon 
the old handloom one could weave forty yards of shirting in the 
week. Today the weaver may produce in a week sixteen hundred 
yards, or forty times as much. If the making and delivery of the 
raw material and the distribution oi a finished product forty times 
as great be taken intO' account, no one will doubt that the machine 
stimulates more activity than it displaces. 

The Hoe press prints, folds, cuts, and pastes seventy-two thous- 
and eight-page journals in a single hour. To gather the material, 
make and deliver the raw paper, finally to distribute the printed 
sheets daily in twenty states, must bring occupation to many more 
than the machine dislodged. 

Invention has created hundreds of new industries. The rail- 
road alone employs more than a million. The telegraph, telephone, 
bicvcle, illustrate new vocations made outright for millions of work- 
ers. The railroad displaced the coach, but the express business, 
affiliated with the railroad, has set to work many men where the 
old coach employed one. The telegraph and telephone have made 
work for many times more than can ever have been displaced. The 
moment that the indirect services which invention produces are 
estimated, the case appears stronger still. 

These showy achievements have been thought to be the final 
and crushing answer to labor's complaint. The answer is not final. 
The workman has learned the indirect, long-run advantage of much 
machinery, but he is incontestably right in striving, with his full 
associated strength, to get all possible immediate advantages from 
the invention ; to lessen individual and short-run evils. This half- 
blind instinct of labor it at one with what we are all slowly learn- 
ing ; namely, that they who own much of the great mechanism, es- 
pecially if it rest on a natural monopoly, may get and long keep 
to their excessive fattening, privileges and resources that should 
be far more open to the general enrichment. If we add political 
control to this private control of machinery and natural oppor- 
tunity, we have that against which the whole storm, of social dis- 
content wil beat in the next generation. Labor's relation to some 
specific forms of industrial machinery, as now owned and guarded, 
is precisely that of our own wider relation to certain monopolized 
privileges. 



LABOR PROBLEMS 453 

246. Machinery Increases Employment. 

BY LJiONK LWI. 

The first introduction of machinery may indeed displace and 
diminish for a while the employment of labor, may perchance take 
labor out of the hands O'f persons otherwise not able tO' take another 
employment, and create the need for another class of laborers alto- 
gether; but if it has taken labor froin ten persons, it has provided 
labor for a thousand. How does it work? A yard of calicO' made 
by hand coasts twO' shillings, made by machinery it may cost four 
pence. At two shillings a yard few buy it ; at four pence a yard 
multitudes are glad tO' avail themselves of it. Cheapness promotes 
consumption ; the article which hitherto was used by the higher 
classes oul}^ is now to be seen in the hands of the laboring class as 
well. As the demand increases, so production increases, and to 
such an extent that although the numher of laborers now employed 
in the production of calico may be immensely less in proportion to 
a given quantity of calico, the total number required for the millions 
of yards now used greatly exceeds the number engaged when the 
whole work was performed without any aid of machinery. 

247. Machinery and the Demand for Labor. 

BY J. A. HOBSON. 

The motive which induces capitalist employers to introduce into 
an industry machinery which shall either save labor, by doing the 
work which labor did before, or assist labor by making it more 
efficient, is a desire to reduce the expense of production. A new 
machine either displaces an old machine, or it undertakes a process 
of industry formerly done by hand labor without machinery. 

When a new process is first talcen over by machinery the ex- 
penses of making and working the machines, as compared with the 
expenses of turning out a given product by hand labor, will involve 
a net diminution of employment. Proof of this is the introduction 
of the new machinery ; otherwise no economy would be effected. 
Neither in economic theory nor in industrial practice is there any 
justification for the belief that the net result of improved machinery 
is a maintenance or an increase of employment within the particular 
trade, or even within the group of the interdependent trades en- 
gaged in producing or supplying a class of commodities. ,Still less 
support is there for this belief as applied to the trade of a par- 
ticular locality or national area. While the introduction of new 
labor-saving machinery in type-setting and printing has been fol- 



454 READINGS IN ECONOMIC PROBLEMS 

lowed by so large an expansion of business as to employ increased 
numbers of workers, recent improvements in mO'St British textile 
mills, cotton, woolen, hemp mills, have been followed by an absolute 
reduction of employment. Statistics point to the conclusion that 
the further a nation advances in the application of labor-saving ma- 
chinery to the production of goods which satisfy the primary needs 
of the population, the smaller the proportion of the total employed 
class engaged in these productive processes. The best available sta- 
tistics indicate that the proportion of employment afforded by the 
staple manufacturers as a whole diminishes after modern machine 
methods are well established, and that the tendency is strongest in 
those manufacturers engaged in supplying ordinary classes of tex- 
tile, metal, and other goods in the home markets. 

In order to judge the net effect of labor-saving machinery upon 
the volume of employment, a wider view is necessary. If the first 
effect is to cheapen goods, we need not look to the expansion of 
demand for this class of goods to absorb the labor which it is the 
object of the machine to displace. We must look to the expansion 
of demand for other sorts of goods due to the application of the 
elements of income saved by the fall of prices in the first class of 
goods. For instance, if cotton goods are cheaper owing to im- 
proved methods of production, the chief result may be to increase 
the demand for furniture. 

This wider outlook enables us to conclude that though the 
effect of machinery may 'be a reduction of employment in a special 
trade or group of trades, the general result must be to maintain 
the same aggregate volume of employment as before, provided the 
income liberated from a particular demand is applied to other de- 
mands for commodities. If, as may be objected, there is a simul- 
taneous tendency to reduce the prices of most articles of ordinary 
consumption, bv applying machine methods of production, the 
normal result would be to stimulate new wants, and so to create 
new channels of production yielding employment to displaced labor. 
That this is the fact in the world of industry no one can seriously 
doubt. 

If the improvements of machine-methods were regular, gradual, 
and continuous in the several industries, no considerable effect in 
reducing the volume of employment would occur. But where in- 
dustrial improvements are sudden, irregular, and incalculable, na- 
tural adjustment is not possible. It is this irregular action which 
has proved so injurious to large bodies of laborers whose employ- 
mient is subjected to a sudden and large shrinkage. From time to 
time ereat numbers of skilled workers find the value of their per- 



LABOR PROBLEMS 



455 



sonal skill cancelled, and are driven either to accjuire a new skill 
or to compete in the tmskilled market. Yet history certainly shows 
that the fuller application of great inventions has been slow, allow- 
ing' ample time for adjustinient. In most cases where distress has 
been caused, the directly operative influence has not been intro- 
duction of machinery, but sudden change of fashion. The sud- 
denly executed freaks of protective tariffs have also been a source 
of disturbance. So far as the displacement has been due to ma- 
chiner}^ sufficient warning has been given to check the further flow 
of labor into such industries and to divert it into other businesses. 
Moreover the changes which are taking place in certain machine 
industries favor the increasing adaptability oi labor. Many machine 
processes are either common to many industries, or are so narrowly 
distinguished that a fairly intelligent workman accustomed tO' one 
can soon learn another. 

Whether machinery, apart from the changes due to its intro- 
duction, favors regularity or irregularity of employment, is a ques- 
tion to which a tolerably definite answer can be given. When the 
employer has charge of enormous quantities of fixed capital, his 
individual interest is strongly in favor of full and regular employ- 
ment of labor. On the other hand great fluctuations in price occur 
in those commodities which require for their production a large 
proportion of fixed capital. These fluctuations in prices are ac- 
companied by corresponding fluctuations in wages and irregularity 
of employment. Why this contradiction? It is that in the several 
units of machine-production we have admirable order and adjust- 
ment of parts. In the aggregate of machine production we have 
less organization and more speculation. Industry has not yet adapted 
itself to the changes in the environment produced by machiner3^ 
That is all. Modern machinery has enormously expanded the size 
of markets, the scale of competition, the complexity of demand, and 
production is no longer for a small, local, present demand, but for 
a large, world, future demand. Hence machinery is the direct 
cause of the fluctuations which bring irregularity of employment. 

But there is another force which makes for an increase of specu- 
lative production. It has been seen that the proportion of the 
workers engaged in producing comforts and luxuries is growing, 
while the proportion of those producing the prime necessities of life 
is declining. Hence the effect of machinery is to drive ever and 
ever larger numbers of workers from the less to the more unsteady 
employments. Moreover, there is a marked tendency for the de- 
mand for luxuries to become moire irregular and less amenable to 
calculation, and a corresponding irregularity is imposed upon the 



456 READINGS IN ECONOMIC PROBLEMS 

trades producing them. This is true of many season and fashion 
trades. The irregularity of these trades prevents them from reap- 
ing the full advantages of the economies of machinery. A larger 
proportion of town workers is constantly passing into trades in 
which changes in taste and fashion are largely operative. 

Thus there are three modes in which modem capitalist methods 
of production cause temporar}^ employment : 

1. Continual increments oi labor-saving machinery displace 
laborers, compelling them to remain unemployed until they have 
adapted themselves to the new situation. 

2. Miscalculation, to which machine-industries with a wide 
unstable market are particularly prone, bring about periodic depres- 
sions of trade, throwing out oi employment large bodies of work- 
ers. 

3. Economies of machine production drive an increasing pro- 
portion of laborers into trades supplying commodities, the demand 
for which is more irregular, and in which the fluctuation in the 
demand for labor must be greater. 

^ 248. The Influence of Machinery on Labor. 

BY AI^T'RED MARSHAI^L. 

The twO' movements of improvement of machinery and the 
growing subdivision of labor have gone together and are in some 
measure connected. It is the largeness of markets, the increased 
demand for great numbers of things, and in some cases of things 
made with great accuracy, that leads to the subdivision of labor ; 
the chief effect of the improvement of machinery is to cheapen and 
make more accurate the work which would anyhow have been 
subdivided. Thus machinery constantly supplants and renders un- 
necessary that purely manual skill, the attainment of which was 
formerly the chief advantage of the division of labor. But this in- 
fluence is more than counter-balanced by its tendency to increase 
the scale of manufactures and to make them more complex ; and 
therefore to increase the opportunities for division of labor of all 
kinds. 

The influences which machinery exerts over the character of 
modem industry are illustrated in the manufacture of Swiss 
watches. Formerly they were made by hand, the subdivision of 
labor being carried very far. In each part of the work a high de- 
gree of skill, but very little judgment, was required. Wages were 
very low. Machinery has now been introduced, and is becoming 
more and more automatic. But the more delicate the machine's 



LABOR PROBLEMS 457 

power, the greater is the judgment and carefulness which is called 
for from those who see after it. The men displaced by the ma- 
chinery had, indeed, very high, specialized skill ; they lived seden- 
tary lives, straining their eyesight through microscopes, and finding 
in their work very little scope for any faculty save a mere command 
over the use of their fingers. But the person who minds the ma- 
chine must have an intelligence and an energ'etic sense of re- 
sponsibility which go a long way towards mailing a fine character. 
He must be able to- earn a high rate of pay. Most of the machines 
which are in use in a watch factory are not different in general 
character from those which are used in any other of the lighter 
metal trades. This latter is a good illustration of the fact that 
while there is a constantly increasing subdivision o^f labor, many 
of the lines of division between trades which are nominally distinct 
are becoming narrower and less difficult to be passed. Now there 
are many more barriers than formerly between minute sub^divisions 
of a trade. But they are altogether of a different kind from the deep 
and broad partitions which divided one group of mediaeval handi- 
craftsmen from another. 

Machinery has to a considerable extent relieved the excessive 
muscular strain which a few generations ago was the common lot 
of the working classes. The house carpenters, for instance, make 
things of the same kind as were used by our forefathers with much 
less toil for themselves. "They now give themselves to- those parts of 
the task which are most pleasant and most interesting. Steam 
mills for sawing, planing and moulding have relieved them of that 
grevious fatigue which used to make them prematurely old. New 
machinery, when just invented, requires a great deal of care. But 
the work of its attendant is always being sifted. That which is 
uniform and monotonous is gradually being taken over by the ma- 
chine, which thus becomes more automatic and self-acting. Those 
trades in which the work in most subdivided are those in which 
the chief muscular strain is most certain to be taken off by ma- 
chinery ; and thus the chief evil of monotonous work is much di- 
minished. It is monotony of life much more than monotony of 
work which is tO' be dreaded. Now when a person's emplo'}Tnent 
requires much physical exertion, he is fit for nothing after his 
work ; and unless his mental faculties are called forth by his work 
they have little chance of being developed. But the nervous force 
is not very much exhausted in the ordinary work of a factory. The 
social surroundings of factory life stimulate mental activity in and 
out of working hours ; and many of those factory workers, whose 
occupations are seemingly the most monotonous, have considerable 
intelligence and mental resource. 



458 READINGS IN ECONOMIC PROBLEMS 

D. THE COURTS AND FACTORY LEGISLATION. 

249. Limitation of Working Day for Women Unconstitutional. 

In 1893 the legislature of Illinois passed an act which among 
other things declared that "no female shall be employed in any 
factory or workshop more than eight hours in any one day, or 
forty-eight hours in any one week." The Supreme Court of the 
state held the law to be unconstitutional. Judge Magruder in mak- 
ing the decision said in part : 

"Does the provision in question restrict the right to contract? 
The words 'no female shall be employed' import action on the part 
of two persons. There must be a person who does the act of em- 
ploying and a person who consents to the act of being employed. 
The prohibition of the statute is two fold: first, that no manufac- 
turer or proprietor of a workshop shall employ any female therein 
more than eight hours in one day; and, second, that no female shall 
consent to be so employed. It thus prohibits employer and employee 
from uniting their minds upon any longer service during one day 
than eight hours. They are prohibited, the one from contracting 
to employ, and the other from contracting to be employed, other- 
wise than as directed. Section 2 of Article 2 of the constitution of 
Illinois provides that 'no person shall be deprived of life, liberty, 
or property without due process of law.' The privilege of contract- 
ing is both a liberty and a property right. Liberty includes the 
right to acquire property, and that means the right to make and en- 
force contracts. The legislature has no right to deprive one class 
of persons of privileges allowed to other persons under like con- 
ditions. Women employed by manufacturers are forbidden to make 
contracts to labor longer than eight hours in a day, while women 
employed as saleswomen, bookkeepers, stenographers, or other 
occupations are at liberty to contract for as many hours of labor a 
day as they choose. The manner in which this section discriminates 
against one class of employers and employees, and in favor of all 
others, places it in opposition to the constitutional guarantees here- 
inbefore discussed, and so renders it invalid. 

"But aside from its partial and discriminating character, this 
enactment is a purely arbitrary restriction upon the fundamental 
rights of the citizen to control his or her time and facilities. It 
substitutes the judgment of the legislature for the judgment of the 
employer and employee in a matter about which they are competent 



LABOR PROBLEMS 459 

to agree with each other. Where the legislature thus undertakes to 
impose an unreasonable and unnecessary burden upon any one citizen 
or class of citizens it transcends the authority intrusted to it by the 
constitution." 

250. Limitation of the Working Day for Women Held Con- 
stitutional. 

The legislature of Nebraska passed a law which provided '"that 
no female shall be employed in any manufacturing, mechanical, or 
mercantile establishment, hotel, or restaurant in this state more 
than sixty hours during any one week, and that ten hours shall con- 
stitute a day's labor." The Supreme Court of the state declared the 
law constitutional, Judge Barnes, in announcing the decision, say- 
ing in part : 

"The members of the legislature are elected from every portion 
of the state and come from every walk in life. They know from 
experience what laws are necessary to be enacted for the welfare 
of the communities in which they reside. They determined that the 
law in question was necessary for the public good, and the protection 
of the health and well-being of the women engaged in labor in the 
establishments mentioned in the act. That question was one ex- 
clusively within their power and jurisdiction. Women and children 
have always to a certain extent been wards of the state. Women in 
recent years have been partly emancipated from their common law 
disabilities. They now have a limited right of contract. They may 
own property in their own right, and engage in business on their 
own account. But they have no voice in the enactment of laws by 
which they are governed. Certain kinds of work which may be 
performed by men without injury to their health would wreck the 
constitutions and destroy the health of women. The state must be 
accorded the right to guard and protect women as a class against 
such a condition; and the law in question to that extent conserves 
the public health and welfare. On the question of the right of con- 
tract, we may well declare a law unconstitutional which abridges 
the right of adult males to contract with each other. The employer 
and the laborer are practically on an equal footing, but this does 
not apply to women and children. Their field of remunerative 
labor is restricted. Competition for places therein is necessarily 
great. The employer who seeks to obtain the most hours of labor 
for the least wages has such an advantage over them that the wisdom 
of the law for their protection cannot well be questioned. If the 
act is the result of a fair, reasonable exercise of the police power of 



46o READINGS IN BCONOMIC PROBLEMS 

the state, it should be upheld. We are unable to find a case where 
the courts have laid down any rigid rule for the exercise of police 
power. There is little reason under our system of government, for 
placing a narrow interpretation on this power, or restricting its scope 
so as to hamper the legislature in dealing with new circumstances 
as they arise." 

251, The Federal Courts on Laws Regulating Employment. 

The attitude of the' Federal Courts on the question of legislative 
restriction of the hours of labor for women is illustrated by the 
• following excerpts from decisions. In these decisions two things 
stand out prominently : first, the courts are at present in a transi- 
tional attitude on the subject of labor legislation; and, second, they 
cannot draw any hard and fast line between the antagonistic factors 
of social interest and individual liberty. 

"It is a question of which of two powers or rights shall prevail,^ 
the power of the State to legislate or the right of the individual 
to liberty of person and freedom of contract. The mere assertion 
that the subject relates though but in a remote degree to the public 
health does not necessarily render the enactment valid. The act 
must have a more direct relation, as a means to an end, and the end 
itself must be appropriate and legitimate, before an act can be held 
to be valid which interferes with the general right of an individual 
to be free in his person and in his power to contract in relation to 
his own labor. 

"It is manifest that the limitation of the hours of labor, as pro- 
vided for in this section of the statute under which the indictment 
was found, has no such direct relation to, and substantial effect upon, 
the health of the employed, as to justify us in regarding the section 
as really a health law. It seems to us that the real object and pur- 
pose were simply to regulate the hours of labor between the master 
and his employees in a private business not dangerous in any real 
and substantial degree, to the health of the employees. Under such 
circumstances the freedom of master and servant to contract with 
each other in relation to their employment, and in defining the same, 
cannot be prohibited or interfered with, without violating the 
Federal Constitution." 

"That woman's physical structure and the performance of ma- 
ternal functions place her at a disadvantage in the struggle for 
subsistence is obvious. By the abundant testimony of the medical 



LABOR PRO BLUMS 461 

fraternity continuance for a long time on her feet at work and re- 
peating this from day to day tends to injurious effects upon the 
body; and as healthy mothers are essential to a vigorous offspring, 
the physical well-being of woman becomes an object of pubHc in- 
terest, and care, in order to preserve the strength and vigor of the 
race." 

E. LABOR AND THE STANDARD OF LIVING. 

252. Tabular Outline of Factors that Determine the Cost of 

Living. 

I. Cost of Living includes : — 

1. Economic expenditures, or such as contribute to effi- 

ciency, of which the chief items are: — 

a. Rent. 

b. Food. 

c. Clothing. 

d. Fuel and light. 

e. Sundries, including outlay for health, recreation, 

amusement, education, religion and government. 

2. Uneconomic expenditures, or such as do not contribute 

to efficiency. 

A. Individual wastage. 

a. Drink. 

b. Luxury. 

c. Amusement. 

d. Domestic waste. 

B. Social wastage. 

a. War. 

b. Governmental extravagance. 

c. Crime, pauperism, insanity, accident, disease, 

unemployment, and the like. 

II. The cost of living should be considered not only absolutely, as 
above, but relatively, as shown by proportion of 
expenditures to incomes : — 

a. Wages. 

b. Salaries. 

c. Profits. 

d. Interest. 

e. Leisure. 

f. Idleness. 



462 READINGS IN ECONOMIC PROBLEMS 

III. The prices of commodities and services that constitute the items 
of expenditure, classified above, are determined 
by supply, by demand, and by value of money. 

1. Supply depends on expenses of production. 

a. Natural resources and marginal productivity of land. 

b. Ordinary competitive expenses : — 

(i) Interest on capital. 

(2) Profits of management. 

(3) Cost of labor, as determined by wages, hours, 

and efficiency. 

c. Effects of legislation : — • 

(i) Sanitary laws. 

(2) Food laws. 

(3) Labor laws. 

(4) Tariff laws. 

d. Effects of combination : — 
(i) Capital, — trusts. 
(2) Labor, — unions. 

e. Effects of wastage : — 
(i) Public and private extravagance. 

(2) Planless and wasteful methods of production 
and distribution. 

f. Effects of improvements and inventions. 

2. Demand depends on: — 

a. Size and growth of population, as governed by birth 

rate, death rate, immigration. 

b. Amount of incomes. 

c. Standard of living, as influenced by advance of cul- 

ture, growth of cities, custom and fashion, habits 
of spending and saving. 

3. Valu? of money depends on : — 

a. Suppy of gold. 

b. Currency system. 

c. Use of credit. 

253. Index Numbers. 

BY WARREN S. THOMPSON. 

Index numbers are a means of indicating precisely the relation 
of the members of a series of numbers to one another. The most 
common method in use is to express each of the series in terms of 



LABOR PROBLEMS 



463 



its percentage of a given member of the series. An example will 
serve to make this method clear. L,et us suppose that a given 
quantity of the best sirloin steak cost 

$1.00 in 1900 $1.11 in 1907 

1.08 in 1901 1. 12 in 1908 

1.09 in 1902 1. 14 in 1909 

1.09 in 1903 1.25 in 1910 
I. TO in 1904 1.34 in 191 1 
T.09 in 1905 • 1.52 in 1912 

1. 10 in 1906 1.57 in 1913 

Now if we express the price of steak in each of the years follow- 
ing 1900 in terms of the percentage which it is of the price in 1900 
we have the following: — 



1900 is 100% 

1901 is 108% 

1902 is 109% 

1903 is 109% 

1904 is 110% 

1905 is 109% 

1906 is 110% 



1907 is 111% 

1908 is 112% 

1909 is 114% 

1910 is 125% 

1911 is 134% 

1912 is 152% 

1913 is 157% 



Thus we can see at a glance that there was a rise of 12% in the 
price of steak between 1900 and 1908 and that it advanced 52% 
between 1900 and 1912. This method is applicable to any series of 
numbers although its calculation is not usually so simple as in the 
case supposed. 

The United States Bureau of Labor Statistics makes use of 
index numbers to show the relative wages from year to year and 
also to show the relative prices of various articles of food. The 
index numbers as used in this bureau are not based upon the wages 
or prices of a single year as in the above example. Xhey are based 
upon a ten year average — the years 1890- 1899 being used for this 
base. To recur to the above example we could add the prices for 
1900-1909 inclusive and divide by ten and call that result 100%. 
Then the price of steak in each year would be expressed in terms of 
its percentage of this ten year base. 

Index numbers may be simple or compound, weighted or un- 
weighted. The simple index number is that described above. The 
compound is obtained in the following manner. Take several 
articles of food, e. g., steak, sugar, and flour and find the index 
number for each of these for a period of years. Add these three 
index numbers for each year and divide by three. The result is a 



464 READINGS IN ECONOMIC PROBLEMS 

compound index number for* these three commodities in each year 
for which we have prices. 

The compound index number may be weighted or unweighted. 
The one described above is the compound unweighted index num- 
ber. In order to weight this number it would be necessary to proi- 
ceed as follows : Suppose that the average family spends three 
times as much for steak as it does for sugar and twice as much for 
flour as for sugar in a year. Then it buys the equivalent of six 
portions of sugar. Now take the index number of each of these 
three articles and multiply that for steak by three and that for flour 
by two and add these tO' that for sugar. Divide the result by six 
and the result is a compound weighted index number for these three 
articles. The advantage of this index number is to show more ac- 
curately the general change in prices when the importance of these 
various articles in the family budget is taken into account. 

Index numbers may be put tO' various uses. They may be used 
to express the relative prices of all kinds of co'mmodities through 
a series of days, weeks, months or years; they may be used to show 
the wages of labor in the same day ; they may alsoi be used to indicate 
the relative purchasing power of money. In fact index numbers 
are a convenient way of expressing any series of numbers so that 
their precise relations to a common base and to one another are 
apparent at a glance. This is done best by the use of percentages. 

254. A Wage-Earner's Budget. 

BY LOUISE BOIvARD MORE. 

This household consists of father and mother, both born in Ire- 
land, and two boys, 8 and 9 years of age. The. man is a steady, tem- 
perate, unskilled laborer. Neither Mr. nor Mrs. R. have known any 
higher plane of living than their present surroundings; both are 
uneducated, but the woman especially possesses considerable native 
thrift and intelligence. This family is representative of the average 
family of this size on a fairly stead}^ income of $12 a week, with no 
drink, sickness, or unusual conditions to make it abnormal. The 
man was out of work for six weeks in the year, but that is not un- 
usual. The woman is neat, honest, and reliable, and trys hard "to 
get ahead." For three months the man had night work as stable- 
man at $13 a week. The family has never been dependent, but 
while the man was out of work a sister gave them $25 as a present, 
and they were obliged to draw $10 from the little which they had 
saved in the bank. The total income for the vear was : 



LABOR PROBLEMS 465 

Mr. R. : 33 wks. at $12.00 

13 wks. at 13.00 $565.00 

Drew from Bank 10.00 

Gift from sister 25.00 

Total $600.00 

The estimated expenditures were as follows : 
Rent — 2 mos. at $10.00, 7 mos. at $12.00, 3 mos. at $11.00. .$137.00 

Food — ^From $4.00 to $7.00 a week 277.00 

Drink — (pint of beer at supper daily) 36.40 

Clothing 40.00 

Light and fuel 52.00 

Insurance from 5D to 75 cents a week 29.25 

Papers, 1 1 cents a week 5.72 

Church, 35 cents a week (for 50 weeks) i7-50 

Man's spending-money 25.00 

Sundries 2.63 

Total .$622.50 

Deficit 22.50 

This deficit consisted of bills owing to the butcher and grocer 
amounting to $10, back insurance payments equal to $2.50, and 
clothing bought "on time" on which $10 was still unpaid. The rent 
varied because the family had moved twice in the year, looking for 
cheaper rent. The last rooms, for which they paid $10 a month 
rent, were three dark, small rooms. The light of the "parlor" at the 
back of the tenement was almost shut off by a large factory built 
close to it. The windows in the kitchen and bedroom opened on an 
air-shaft. The rooms, however, were very neat, lace-curtains at the 
windows, plush furniture, pictures of the family, carpet on the floor, 
and all the bric-a-brac usual in homes of this class. There was a 
white iron bed in the bedroonn, with the customary folding-bed for 
the children. 

The expenditure for food varied greatly. A budget kept for a 
week showed $7 spent for food, but Mrs. R. said they could only 
spend that much when the man was working steadily or when there 
was no rent to pay. The weeks in which semi-monthly payments of 
rent were made, the food allowance was cut down to about $4 a 
week. Whenever there was any unusual expense the food suffered. 
During the six weeks the man was not working they did not spend 



466 READINGS IN ECONOMIC PROBLEMS 

more than $4.50 a Aveek for food. This is an ilhistration of a very 
common condition among wage-earners and is due to the fact that, 
on the prevaiHng rate of unskilled wages, it is difficult if not impos- 
sible for a family to prepare for such emergencies. Mrs. R. esti- 
mated that ^2^^ had been spent for food in the year, making these 
allowances, and that the average per week would be about $5.33. 
On the whole, the food was adequate and wholesome, and the entire 
family appeared to be in good condition. They had nO' illness dur- 
ing the year. 

The standard of dress is classed as ''medium." They had few 
clothes, but took good care of them. The father had plain working- 
clothes, the mother always wore wrappers at home, and only had 
one street dress, as she never went anywhere except to church. The 
boys were neat and clean. Mrs. R. bought clothing "on time" — she 
was ashamed of it, but said the boys could not have new suits for 
Easter unless she did. She itemized the expenditures for clothing 
for the year as follows : 

Man, I pair shoes $ 2.00 

Woman, i pair shoes 1.25 

Two^ boys : 2 suits 7.00 

2 overcoats 11 .00 

4 pairs shoes at 75 cts., 

4 pairs at 69 cts 5.76 

Mending shoes 2.80 

2 pairs pants, $1.00; 4 sets under- 
wear $1.60 2.60 

4 shirt-waists; 2 at 50c and 2 at 30c. ... 1.60 

4 caps 70 

Miscellaneous 5.29 

Total $40.00 

Mrs. R. cannot sew, and buys all their clothes ready-made of a 
cheap quality, but the little boys are not hard on their clothes. Her 
sister knits stockings for the entire family. 

The expenditure for coal and gas and oil was rather high, owing 
to the dark rooms. Coal was bought by the bushel, and the man 
brought home wood free for kindling. Gas was burned in two 
places where they lived, and the gas-bills for nine months amounted 
to $11.20. In all, coal cost $3775 (at $ .25 a bushel), and oil for 
three months about $3.05 — total $52. 



LABOR PROBLEMS 467 

This family did not spend one cent for recreation, except what 
the father had out of his "spending-money." This was very little, for 
while he was earning $12 a week his wife gave him not more than 
$ .40 a week and often only $ .25 ($ .15 for tobacco and $ .10 for 
a shave), but when he earned $13 a week (for 3 months) he kept 
out a dollar a week for "spending-money." His allowance for the 
entire year would not exceed $25. He gave all the rest to ]\Irs. R., 
who said he was a "model husband." They are very religious and go 
to the Catholic Church every Sunday, only missing two^ Sundays in 
the year. They pay 10 cents each for a seat, put 10 cents in the col- 
lection, and give the boys 2 or 3 pennies for the collection, making 
a total of $ .35 a Sunday. 

They were all insured for $ .50 a week, $ .15 for the man, $ .15 
for the woman, and $ .10 each for the boys, until the man's wages 
were raised tO' $13, when his wife raised his insurance policy and 
paid $ .40 a week for him. This extra amount was more than they 
could afford to* pay, for in those 13 weeks they dropped behind $2.50 
on the insurance payments. 

The only reading is the penny papers. The boys are sent tO' the 
parochial school, and the parents are very ambitious for them. Un- 
less sickness or unemployment comes, this family will be able to 
make up the deficit of $22.50 on the man's wages of $13 a week, 
but it is very evident from a study oi these expenditures that it will 
be impossible to save any considerable sum for the future. 

255- Ways of Living in Anthracite Coal Communities. 

BY PETER ROBERTS. 

When Slavs first came tO' this country, it was nothing unusual to 
see a company of 20 or 30 men leading a communal life in a large 
barn. The place was run by a boarding boss and his wife. Each 
man paid a dollar a month for sleeping room. Meat, potatoes, 
coffee, bread and cabbage were bought in common. At the close 
of the month, each paid his pro rata share, which was about $5. One 
of the men said if his share went up $6, "Me kick."A change has 
come. Now single men pay from $2 to $3 a month for lodging, 
washing, etc., and buy their own provisions. It costs them under 
this system- about $10 per month. Many Slav young men, after the 
American example, board and pay $12 a month. The Anglo-Saxon 
boarders pay from $16 to $18. 

A study of the day-ibook of stores, where Anglo-Saxons and 
Slavs deal, reveals very clearly the difference in their standards O'f 



468 READINGS IN ECONOMIC PROBLEMS 

living. A greater variety of articles are consumed by the former 
than by the latter. A store-keeper said, if the bill of a Slav goes up 
to $io a month for groceries, it is high; the bill of the average 
English-speaking family goes up to $20 and $25. By a computation 
made in one of the company stores we found the per capita expendi- 
ture of the English-speaking family to be $5.48 and of the Slav 
family $2.86 per week. In the account of the Slavs we found the 
following items : flour, barley, salt-pork, potatoes, cabbage, pickles 
(barrel), garlic, coffee, sardines (5 cans for 25 cents), eggs, and 
very sparingly butter, cheese and sugar. In the list of Anglo- 
Saxons there were flour, ham, onions, potatoes, cabbages, pickles 
(bottled), cooffee, tea, eggs, lard, dried beef, spices, cakes, crackers, 
raackeral, canned tomatoes, canned peaches, canned apricots, can- 
ned cherries, soap, rubbers, brooms, lemons, salmon, and large 
quantities of butter, cheese, and sugar. The dawn of luxury, how- 
ever, was visible in some of the Slav accounts. 

In amusements the English-speaking spend far more than do the 
Slavs. Theatrical performances are almost wholly supported by 
the native-born. The chief diversion of the Slavs is the saloon, card- 
playing, an occasional dance, and the weddings and christenings 
which occur. The Slavs accumulate more money than the Amer- 
icans. 

256. A "Fair Living Wage." 

EY LOUISi; B. MORi;. 

What, then, is a ''fair living wage" for an average family? The 
Massachusetts Bureau of Statistics puts it at $724 a year for a family 
of five ; the New York Bureau of Labor at $520 ; Mr. John Mitchell, 
President of the United Mine Workers of America, at $600; Mr. 
Robert Hunter, author of "Poverty," says $460 (for actual and 
necessary expenses) ; and Dr. Edward T. Devine, Secretary of the 
Charity Organization of New York City, estimates $600 as a mini- 
mum. These estimates were all made at periods of lower prices 
and cost of living than the present (1906). 

A "fair living wage" should be large enough not only to cover 
expenses which Mr. Rowntree calls "necessary for maintaining 
merely physical efficiency," but it should allow for some recreation 
and a few pleasures, for sickness, short periods of unemployment, 
and some provision for the future in the form of savings, insur- 
ance, or mem.bership in benefit societies. 

The whole question of a fair wage depends primarily on the 
amount and cost of food necessary for proper nutrition. If a man 



LABOR PROBLEMS 469 

is underfed, he must underwork, as Mr. Rowntree says ; his children 
are stunted in growth and intellect, and when a man is unfit for 
\vork he fails to get it or works for the lowest wages. Mr. Rown- 
tree adds : "The most hopeless condition of the poor, as every social 
worker knows, is unfitness for work. Unfitness for work means low 
wages, low wages means insufficient food, insufficient food means 
unfitness for labor, and so the vicious circle is complete." 

This investigation has shown that a well-nourished family of 
five in a city neighborhood needed at least $6 a week for food. 
The average for 39 families, having five in the family, was 
$327.24 a year for food. If we consider $6 a week (or $312 a 
year) as 43.4 per cent of the total expenditure (which was the 
average percentage expended for food in these 200 families, and 
very near the average for the workingmen's families in the exten- 
sive investigation of the Department of Labor), the total expendi- 
ture would be about $720 a year. It therefore seems a conservative 
conclusion to draw from this study that a "fair living wage" for 
a workingman's family of average size in New" York City should be 
at least $728 a year, or a steady income of $14 a week. Making 
allowance for a larger proportion of surplus than was found in 
these families, which is necessary to provide adequately for the 
future, the income should be somewhat larger than this, — this is, 
from $800 to $900 a year. 



F. INDUSTRIAL ARBITRATION. 
257. Arbitration in New^ Zealand. 

BY HUGH H. r,USK. 

The New Zealand Arbitration Law was the first attempt ever 
made on anything like a national scale tO' ensure something like jus- 
tice for the workers, while at the same time it grappled with the evil 
that had been an increasing one in every civilized country for half 
a century. It was recognized that every form of warfare — whether 
between nations, classes, or individuals,- — was in its nature an ap- 
peal to force, and not to fair-play or justice. It was, in fact, an 
appeal to the higher intelligence, as well as to the common-sense, 
both of workers and employers ; and it said much for the innate 
common sense of the classes for whose benefit it was in the first 
place intended, that they were willing at least to give it a trial. 

The Arbitration Law of New Zealand begins with a full recog- 



470 



READINGS IN ECONOMIC PROBLEMS 



nition of the principle of Trades Unionism, which it makes use of 
as the basis of the new law. It provides that any Union containing: 
a certain number of members may avail itself of ,the benefits 
of the statute by registering the association as one subject to the 
provisions of the law. Associations may even by voluntary regis- 
tration render their members subject to the provisions of the statute, 
and afterwards withdraw their registration, by giving six months' 
notice of their desire to do so. The only compulsory feature of the 
statute is that as long as the association and its members remain 
registered they shall be subject to the provisions of the statute. 

These provisions are aimed directly at the prevention of indus- 
trial warfare by making it a punishable offence for any body of 
workers to leave off work in concert, for the purpose of compelling 
the employers in any trade or employment to agree to a demand for 
higher wages, or any other alteration in the conditions of their em- 
ployment. On the other hand it is equally an offence for any asso- 
ciation of employers tO' discontinue the employment of their workers 
for the purpose of compelling their agreement to any change in 
their rates of payment, in their hours of work, or toi any other pro- 
posed change in the existing conditions of employment. Instead of 
a resort either to the strike or the lock-out, the law provides that 
whenever a dispute arises in any trade in which either the workers 
or the employers are registered as an association under the pro- 
visions of the statute, either party may at oiice call in the assistance 
of the local Board of Conciliation, whose duty it is to meet the 
representatives of the parties, and endeavour by all reasonable means 
to bring about an agreement on the matters in dispute. In case 
conciliation should prove ineffectual, however, it becomes the duty 
of the conciliator to refer the question tO' the Arbitration Court 
without delay. This court consists of five members in all, two of 
whom are chosen by the votes of the registered associations of the 
workers, and two- by those of the registered associations of em- 
ployers, while the fifth member of the Court is one of the judges 
of the Supreme Court, . who is also President of the Arbitration 
Court, and is from time to time appointed by the Government to 
this particular office. The decisions of the Court are declared by 
the statute to be final, and subject toi nO' appeal, except on the single 
ground that the question dealt with is beyond the powers given to 
the Court. 

The judgments of the Arbitration Court may be enforced either 
by fines, levied on the property of the Associations, or of individual 
members ; or by imprisonment of the officers, or of members of 



LABOR PROBLEMS 471 

such associations as may be declared guilty of contempt of the 
Arbitration Court. 

Its purpose was to substitute the calm judgment of a court for 
the prejudiced opinions of those whose interests were directly at 
stake. It was characteristic of the New Zealand point of view 
that it took for granted the willingness of all classes of the com- 
munity to submit to whatever was held to be fair and just by a court 
of this kind, rather than to insist on fighting a battle, in the hope 
oi gaining what they wanted, without reference to its absolute fair- 
ness tO' the other side. 

The methods by which the New Zealand Arbitration Court has 
arrived at its conclusions are probably without precedent in the 
history of modern commercialism-, and it was only natural that, es- 
pecially at first, they should have been resented by the class that 
by long habit had been taught to look on all that capital could get 
from the necessities of the class of workers as something that be- 
longed to- themselves by a right more unquestionable than the so- 
called Divine right of kings in times gone by. The first duty of the 
Arbitration Court, in all cases where the amount of wages was in 
dispute, w^as to- ascertain what it should cost the average worker, 
wdth a wife and family, to live in reasonable comfort and respect- 
ability. The second duty of the Court was to ascertain how" much 
the profits of the employers in an ordinary year would enable them 
to pay. The first question was one of national policy. The second 
question was one of fair-play and ordinary justice, as between man 
and man ; and to form a fair and intelligent conclusion it was neces- 
sary to learn a good many things that had been regarded in the 
past as the business of the employers, and of nobody else. The 
essential principle of the arbitration law of New Zealand entirely 
contradicted this assumption. The employers of labour were only 
one, and in numbers very much the smallest one, of three classes 
which together form the community. From the point of view of 
the New Zealand statvite they had certainly no greater interest in 
the question oi the profits of the trade than the workers by whose 
exertions profit was rendered possible, and even less than that of 
the community at large, whose dut}^ as well as interest it was to 
see justice done to every class of its people. 

It may be said that the answer to the question of the amount 
of wages needed to secure a decent living for the workers and their 
families was, after all, a matter of opinion, and possibly even of 
prejudice. Fortunately there was in New Zealand, as, indeed, there 
is probably in every country a court of appeal on matters of opinion 



472 



READINGS IN ECONOMIC PROBLEMS 



that may generally be trusted to take a view of such questions that 
is tolerably fair. The New Zealand statute has provided for such 
an appeal, by providing that the proceedings of the Arbitration 
Court should in all cases be conducted in public, so that the evidence 
given should be open to the press and known to the people. In dif- 
ferent communities, it is true the public opinion thus formed might 
differ considerably ; but in every country, it may be said with con- 
fidence, the opinion thus formed would exercise a powerful influ- 
ence on a court of arbitration. What the Court had to do, therefore, 
in cases in which questions of the rate of wages was at stake, was 
in the first place to decide on the lowest reasonable living wage — 
and this was practically the same in every trade or employment. 
This lowest living standard, as it did not depend on the profits of 
the business, was not affected by the question either of capital in- 
vested, or of the conditions of the trade. 

The question of the minimum wage, however, w^as only a part, 
and a small part, of the problem with which the Arbitration Court 
had to deal. While it was clear that nobody could be allowed to 
pay less than a living wage to those employed, the question of 
justice demanded a good deal more than this before it could be said 
to be fairly settled. The old idea that the man who found the money 
should have everything, and the man who found the labour as little 
as possible, had been abandoned in New Zealand ; the problem w^iich 
the Court had to solve was the somewhat indefinite one — what was 
fair? To enable this to be done the law provided that the Court 
might call on the employers, in any dispute as to wages, to produce 
the books containing the accounts of their business, and to show 
exactly what capital was invested in it, and what profits had been 
earned. The task of the Court was by no means an easy one. Even 
w^hen the books of a business had been produced, and the capital 
invested, and the profits made had been ascertained, the question 
remained what ought the employers to give out of the profits to the 
workers, without whose assistance no profits could have been 
earned? What, as a matter of fact, the Arbitration Court of New 
Zealand has done during the sixteen years of its existence has been 
to come to some conclusion that seemed fair in each case. The 
principle of a real partnership has been acknowledged by the Court, 
but the shares due to the partners have been matters of opinion, and 
the awards of the Court have, as a consequence, always been open 
to criticism by one or other party to the dispute. 

There have been many such criticisms, both in the colony itself 
and elsewhere; but as a rule the parties most nearly concerned have 



LABOR PROBLEMS 473 

admitted that the decisions of the Court were conceived in a spirit 
of fair-play as between the parties. The law has now been in force 
during sixteen years, and it has been accepted by both employers 
and employed as the controlling force of the industrial life of 
nearly a millio'n people of our own race. Amendments have' from 
time to tinie been made in the law, as new features have appeared 
that seemed to call for regulation, but in all essentials the law that 
was conceived in a spirit of fair-play and justice — recognizing 
equally the rights of Labour, Capital, and of the people at large, 
sixteen years ago, remains in force today, and, like all the other 
laws of New Zealand, is enforced without fear or favour. 

258. Compulsory Arbitration in Theory and Practice. 

BY JAMKS KDWARD Ll5 ROSSIGNOL AND WILLIAM DOWNIE STEWART. 

There is a pretty well-defined theory in justification of compul- 
sory arbitration in the minds of those who favour that method of 
settling industrial disputes. The competitive system, in this view, 
has resulted in two great evils ; sweating and strikes. Under sweat- 
ing the workers receive less than enough to secure a decent subsist- 
ence for a human being, and the strike is a form of private war in 
which the strongest win, not those who have justice on their side, 
and which causes great inconvenience to the public, who' are a third 
party in every strike. All this evil and injustice should be done 
away with by an appeal to a court. 

On the surface the theory appears to be highly reasonable, but 
when put intO' practice serious, if not fatal, difficulties arise. One of 
these has to do with the discovery of specific principles of justice; 
the other with the enforcement of awards supposedly just. 

The theory oi fair wages that appears to prevail is the doctrine 
of the living wage, stated both in its negative and its positive form. 
Stated negatively, the theory holds that extremely low wages, such 
as are found under the sweating system, are not fair wages, be- 
cause insufficient to- affoird a decent living according tO' the colonial 
standard. Stated positively, a fair wage is a wage which is suf- 
ficient to give the worker a decent living according to the colonial 
standard. 

Cither difficulties arise when the theories are applied to actual 
cases. For example, a wage which would be quite sufficient for a 
single man might be inadequate for a married man, and should vary 
with the size of his family and their ability to contribute tO' their 
own support. Again", a living wage for a skilled worker must be 



474 READINGS IN ECONOMIC PROBLEMS 

higher than that for a common labourer, since his standard of liv- 
ing is higher. This arises from the fact that skilled labourers are 
scarce, but this introduces another complicating factor, the supply 
of labour, which, in densely populated countries, threatens to de- 
stroy, not only the theory, but the possibility of a living wage. 

These and other complications prevent the creation of a bodv 
of legal principles defining and explaining the nature of fair or 
reasonable wages, but do not prevent the Court from bearing in 
mind the desirability of keeping the customary standards of colonial 
life from falling, and the equal or greater desirability of raising 
those standards as much as possible. The doctrine of a living 
wage, then, is not an established legal principle, but an ideal toward 
which people may strive. 

In practice, the awards appear to be based on two main prin- 
ciples ; first the desire and intention of the Court to secure a living 
wage to all able-bodied workers; second, the desire of the Court to 
make a workable award, that is, to grant as much as possible to the 
workers without giving them more than the industry can stand. 
In doing this regard must be had to the prosperity of a given in- 
dustry as a whole, if not to the profits of individual employers. It 
is usually taken for granted that no reduction will be made in the 
customary wages in any industry, and, in times of depression, this 
might be regarded as a third regulative principle. Again, it is 
the custom of the unions, in formulating their disputes, to demand 
more than they expect to get, knowing that, in the worst case, they 
will lose nothing. So frequently has this been done that one might 
almost lay down a fourth regulative principle, the principle of split- 
ting the difiference. 

The rigidity of system which is characteristic of the railway 
rates seems to be taking possession of the regulation of wages also. 
When the awards v/ere few in number, it was easy to make a change 
without any serious disturbance to industry ; but now that they are 
numerous and their scope has been widely extended, it is difficult 
to make a change in one without making many other changes, for 
the sake of adjusting conditions of labour tO' the changing con- 
ditions of business. 

Another stumbling-block in the way of advance in wages is the 
inefficient or marginal or no-profit employer, who, hanging on the 
ragged edge of ruin, opposes the raising oi wages on the ground 
that the slightest concession would plunge him into bankruptcy. His 
protests have their efifect on the Arbitration Court, which tries to 
do justice to all the parties and fears to make any change for fear 



LABOR PROBLEMS 475 

of hurting- somebody. But the organized workers, caring nothing 
for the interests of any particular employer, demand improved con- 
ditions of labour, even though the inefficient employer be elimi- 
nated and all production be carried on by a few capable employers 
doing business on a large scale and able to pay the highest wages. 
This is not to say that even the most efficient employers could 
afford to pay wages much in excess of those now prevailing. 

From such a statemient as this it is but a step to the position that 
wages are determined chiefly by economic laws, and that the Arbi- 
tration Court can cause, at mo'St, very slight deviations from the 
valuations of the market. 

It is not easy to show that compulsory arbitration has greatly 
benefited the workers oi the Dominion. Sweating has been abol- 
ished, but it is a question whether it would not have disappeared 
in the years of prosperity without the help of the Arbitration Court. 
Strikes have been prevented, but New Zealand never suffered much 
from strikes, and it is possible that the workers might have gained 
as much, or more, by dealing directly with their employers as by 
the mediation of the Court. 

It is a common opinion in New Zealand that the increase in the 
cost of living has been due largely to the high wages and favourable 
conditions of labour fixed by the Arbitration Court, but so wide- 
spread a result cannot have been due chiefly to local causes. 

Manufacturers complain that the awards have been so favour- 
able to the workers as to make it difficult to compete with British 
and foreign manufacturers, and demand that either the arbitra- 
timi system be abolished or that they be given increased protection 
by increased duties on imported goods. It is claimed that the growth 
of manufactures has not kept pace with the growth of population 
and the importation of manufactures from abroad. 

There is such agreement among manufactuirers as to the effect 
of compulsory arbitration in increasing the cost of production that 
their statements cannot be lightly dismissed, especially as many un- 
biased writers concur in the opinion. 

Unquestionably, manufacturers, with the exception of the great 
industries which work up raw materials for m^arket, are not doing 
any too Avell, but it is not likely that compulsory arbitration is the 
chief cause of this. The high wages which manufacturers have to 
pay are due chiefly to industrial conditions which always prevail 
in a new, thinly populated country with great natural resources 
awaiting development. 



476 READINGS IN ECONOMIC PROBLEMS 

G. THE MINIMUM WAGE. 
259. The Victorian Minimum Wage and Productive Efficiency. 

BY SIDNEY AND BEATRICE WEBB. 

A leg-al minimum wage has, in certain trades, been fixed and en- 
forced for five years, and in many other trades for a shorter period. 
Thus, the minimum weekly wage for tailoresses was fixed,' to be- 
gin with, at twenty shilHngs a week, that for shirtmakers at six- 
teen shillings, and that for adult male boot and shoe operatives at 
forty-two shillings, these time rates being in each trade also trans- 
lated into equivalent piecework lists. These wages were consider- 
ably above what many of the operatives had previously been re- 
ceiving ; but, notwithstanding this fact, neither the volume of trade 
nor the employers' profits appear tO' have been affected. We could 
not ascertain that there had been, up to 1898, any diminution of 
employment in the trades concerned ; on the contrary, the numbers 
at work had certainly increased. W^e could find no evidence that 
prices had risen, and we were informed by employers that they had 
not done so. Nor were the employers themselves dissatisfied with 
the result. The explanation of the paradox lies, as we satisfied our- 
selves, in the very significant fact that, when the employers found 
themselves compelled tO' pay a standard wage to all whom they 
employed, they took care to make the labor as productive as pos- 
sible — they chose their workers more carefully, kept them fully em- 
ployed, introduced new processes and machinery, and in every way 
made the industry more efficient. 

What the Victorian law does is, in effect, to compel employers 
and workmen to formulate, by common consent, minimum con- 
ditions for their own trade, which can be altered when and as re- 
quired, but" which are for the time being enforced by law. No em- 
ployer is compelied to continue his business, or to engage any work- 
man ; but if he chooses to do so, he must, as a miinimum, comply with 
these conditions, in exactly the same way as he does with regard 
to the sanitary provisions of the Factory Acts. No workman is 
-compelled to enter into employment or forbidden to strike for bet- 
ter terms, but he is prevented from engaging himself for less than 
the minimum wage, exactly as he is prevented from accepting less 
than the minimum sanitation. The law, in fact,' puts ever}- trade in 
which a wage board is established in the position of the best organ- 
ized industries in this countr}% where every finn; and every workman 
finds the conditions of employment effectively regulated by a collec- 



LABOR PROBLEMS 



477 



tive aj^reement. No individual can break away from the agree- 
ment, and no strikes, picketing, or other disorderly proceedings are 
ever needed to maintain its operation. This seems to us a distinct 
advance on the anarchic private war to^ which the settlement of the 
conditions of employment is otherwise abandoned. 

It is obvious that the Victorian system brings greater advant- 
ages to the weaker trade than to those strongly organized. We 
think that experience in this and other countries confirms the eco- 
nomic conclusion that there is no way of raising the present scanda- 
lously low Standard of Life of these classes, except by some such 
legal stiffening as that given by the Victorian law. 

260. The Evasion of the Law in Victoria. 

BY THE; ROYAL COMMISSION FROM NEW SOUTH WALKS. 

Under a promise of secrecy I was able tO' obtain from one oi the. 
persons employed in one of the factories full particulars as to what 
was going on. An inside worker, although he works the full time, 
is paid for a less number of hours, while an outside worker is paid 
for a less number of pairs than he makes. TwO' books are kept, 
one for the benefit of the Inspector, which the employee signs, and 
in which the entries are false, the other for the information of 
master and men only. When such a system is established it is al- 
most impo'ssible for the Inspector to discover what is going on. The 
safety of the employer lies in the fact that his hands are those who 
cannot earn the minimum wage, and can only obtain employment in 
what may be called an illicit factory, and if they disclose the truth 
they bocome marked men, and lose all chance of any employment. 
Figures and all particulars were given me, but I do not set them out, 
as I do not wish to give any clue as to whom my informant is. I 
gather that there is at least 250 hands employed in this way. 

261. The Effects of a Minimum Wage in the United States. 

BY A. N. I-IOLCOMBIv. 

The immediate direct effect of the establishment of a minimum 
standard-of-living wage would be to put an end to the employ- 
ment of normal adult workers at lower rates. Not every wage- 
worker who has been employed at lower rates would necessarily 
be deprived of employment, nor would the wage of every such 
wage-earner necessarily be increased to the standard minimum rate. 
Some employees would receive the increase, and some would lose 
their employment. The actual effect would depend partly upon the 



478 READINGS IN ECONOMIC PROBLEMS 

efficiency of the wage-earners concerned, and partly upon the char- 
acter oi the demand for their services. In industries like depart- 
ment stores and steam laundries, which serve local markets and are 
free from outside competition, probably the increase of wages could 
be paid to all employees below the minimum without so increasing" 
the cost of production as to produce a material decline in the de- 
mand. But in industries serving a wider market and subject to out- 
side competition, such as cotton mills and shoe factories, the estab- 
lishment of a legal minimum wage might reduce employment rather 
than increase wages. The outcome would depend largely upon the 
extent of the necessary increase and the rapidity with which it 
should be put in force. Some sweated industries might be alto- 
gether incapable of maintaining themselves. But such as these the 
country would be better without. 

The greatest difficulty arises in the cases where work-people of 
distinctly different standards of living come into competition with 
one another. Unless the groups are of equal efficiency, the attempt 
to establish a single standard for all might result in securing the 
industry to the most efficient group and excluding the others from 
all employment therein. To attempt to establish an American stand- 
ard-of-living wage for alien races of distinctly lower standards and 
lower efficiency would probably result in the exclusion of many 
aliens from employment in the country. It would also result in the 
exclusion of most of the negroes from the occupations in which the 
wage should be adjusted to the efficiency of the native whites. A 
legal minimum wage would probably be of advantage in promoting 
a better distribution of such immigrants among our various 
Industries. 

The indirect economic effects of the establishment of a minimum 
standard-of-living wage may be mentioned summarily. 

First, the establishment by legislation of such a wage would 
make available to the poorest and most helpless of the laboring 
population a share in the advantages obtained by the better-to-do 
and stronger through voluntary association. An advantage would 
be the greater security for the protection of the interests of the 
public against the abuse of irresponsible power in the interests of 
special classes. 

Secondly, the line would be more sharply drawn between the 
unemployable and the merely unemployed. It would also tend to 
restrict the influx of the unemployable from abroad, thus at once 
checking the increase of inferior labor and raising the average 
efficiency of the domestic supply. 

Thirdly, there would result a restriction of the field of competi- 



LABOR PROBLEMS 



479 



tion between workpeople. The wage-earner whose chief recom- 
mendation is his wilHngness to work for a pittance would lose the 
advantage of his stibmissiveness, and skill and strength would 
become of greater importance in obtaining employment. 

Fourthly, there would result a restriction of the field of com- 
petition between employers. The employer whose chief stock in 
trade is his shrewdness in driving hard bargains would lose his 
advantage. The peculiar qualities of the best type of business men 
would be of greater importance in the achievement of success. 

262. Answers to Objections to Wages Boards. 

BY Constance; smith. 

Many of the objections ordinarily advanced against Wages 
Boards, or, indeed, against any proposal to regulate wages, are 
little more than a re-statement of the arguments employed to defeat 
the passing of the earlier Factory Acts. They rely for support on 
the principle, more or less disguised, of Idisser faire. But there 
are some, more strictly addressed to the practical proposal now 
before the country, to which it seems desirable to give such brief 
consideration as space permits. 

First, there is the fear frequently expressed, that Wages Boards 
would increase unemployment, by pushing out of the labor market 
the less competent worker, who is unfit to earn even the minimum 
rate, and by giving the coup de grace to weak and tottering indus- 
tries. The existing Wages Boards legislation of Victoria, makes 
special provision for the case of the old and slow worker. But 
granted that there are individuals of this class who will be unable, 
under the new conditions, to find emplo3mient, even at special rates, 
there still remains the question whether it is not wiser, on purely 
economic grounds, to face boldly the necessity of maintaining for a 
while a certain number of persons physically or mentally incapable of 
fully maintaining themeslves, rather than of condemnmg to "half 
employment" an infinitely greater number of people who, given a 
fair chance, are perfectly able to earn their own living. 

But sound economists who have carefully studied the subject 
do not hold that under a Wages Board system we should have a 
"net" reduction of employment. Since the first result of the estab- 
lishment of such a system will be an increased wages bill, involving 
the transference of a fresii portion of wealth to the pockets of 
certain classes of workers, there must at once follow an increased 
purchasing power on the part of those workers and a raising of the 
general standard of consumption in the community. Workers will 



48o READINGS IN ECONOMIC PROBLEMS 

not only buy more, but better articles, and this movement must in- 
evitably tend both to greater volume and greater regularity of 
employment. 

With regard to those industries which are so deficient in capital 
or in organization that they can only maintain a precarious foot- 
hold in the competitive area by under-payment of the workers they 
employ, it is clear that the community would be better off for their 
disappearance. 

Would the cost of production, and consequently the price of the 
article to the consumer, be greatly raised by the etsablishment of 
minimum rates? Daily experience shows that, in a considerable 
number of industries, there is a margin which could safely be drawn 
upon for the levelling-up purposes of a minimum rate. Cases are 
not infrequently found, for instance, in trades employing women's 
labour at a sweated wage, where vigorous representation on behalf 
of the workers, acting upon a wholesome fear of publicity on the 
part of the employing firm, has produced a considerable increase, 
amounting on occasion to som.ething like a doubling of the rate of 
pay. It must be remembered, further, that the cash margin is not 
the only one at the disposal of employers of labour. Human nature 
is lazy, and most people need some stimulus to enterprise. The 
economy which is now too often effected by taking a penny or a 
halfpenny off the wages of the employes, would, were that method 
made impracticable by a Wages Board Determination, be otherwise 
contrived ; by the introduction of improved machinery, by better 
organization, by checking the reckless waste which, where a vast 
quantity of very cheap articles are made by indifferent workers 
labouring desperately against time, swallows up a considerable 
amount of profit every year, and by abolition of the ruinous prac- 
tice of .selling under cost price in the case of certain of the articles 
manufactured, in order to make a market for the rest. Further, all 
industrial experience teaches that with the improvement of the 
workman comes improvement also in his work, even where this is 
highly specialized. Nor is cost of production necessarily lowest 
where the wages are low and the hours long. 

Apprehension is often expressed lest the minimum wage, once 
established in an industry, should become the maximum in that in- 
dustry; and assertions that this actually occurs have not been want- 
ing. Again, there is much testimony from Victoria to support the 
contrary view. Opening, almost at haphazard, the latest Report of 
the Victorian Chief Inspector of Factories, we find, under the 
heading of the Aerated Wa,ter Trade Board, "The Determination is 
well complied with, tJie zuages of many of the men and boys being 



LABOR PROBLEMS 481 

above the minimum." A similar state of things is found to obtain 
at home in industries where minimum rates have been fixed by 
means of collective bargaining or arbitration under the Board of 
Trade. Here, too, the more skilled, industrious, and capable worker 
is able to earn a higher wage than that calculated on the average 
capacity of the average man or woman. 

The last objection to be considered is what may be called the 
moral objection. Many of those who have not been brought into 
personal contact with sweated workers, and with the conditions 
under which sweated industry is carried on, deprecate the setting up 
of any machinery which appears to limit the opportunity for free 
bargaining between employer and employed. They are afraid that 
such machinery may destroy the .spirit of enterprise, and that the 
assumption of responsibility in the matter of wages by the State 
will tend to weaken the personal relation between masters and men. 
To such objectors the best reply is an invitation to study the situa- 
tion at close quarters and at first hand. They cannot then fail to 
perceive that the outstanding features in the present position of the 
sweated worker, especially when that v^^orker is a woman, are 
absolute inability to bargain freely and total lack of independence. 
Such a worker must take the work offered, at any terms that may be 
proposed, under penalty of an immediate drop into the abyss of 
destitution. The spirit of enterprise is rarely found to animate those 
who are working excessive hours for a bare pittance. As to the 
"personal relationship," it is useless to devise schemes for preserv- 
ing it ; for good or evil, it is practically a thing of the past. More 
and more, industry and commerce, like battleships, tend towards the 
"all big" type. Everywhere, the business that was formerly the 
affair of an individual or a family is now the result of the activities 
of an association or a hmited company acting through its salaried 
servants. 

In a great number of cases the employer is practically powerless, 
even now, to deal personally with his employees. In time to come, 
as he becomes increasingly the instrument of great impersonal forces, 
financial and social, behind him, all capacity for such individual 
dealing will be taken from him. It is only by accepting, under the 
sanction of the State, the regulation of wages in those industries 
where it has hitherto gone unregulated, with such results in the 
shape of economic chaos and human degradation as we have been 
considering, that the best employer can save himself from being 
ultimately dragged down to the level of the worst. For him, as for 
his workers, an Act establishing Wages Boards would be a genuine 
measure of protection. 



482 READINGS IN ECONOMIC PROBLEMS 

263. The Massachusetts Minimum Wage Commission Law„ 

An Act to Establish the Minimum Wage Commission and to Pro- 
vide for the Determination of Minimum Wages for Women and 
Minors. 

Section i. There- is hereby estabhshed a commission to be 
known as the Minimum Wage Commission. It shall consist of three 
persons, one of whom may be a woman, to be appointed by the 
governor, with the advice and consent of the council. 

Section 3. It shall be the duty of the commission to inquire into 
the wages paid to the female employees in any occupation in the 
commonwealth, if the commission has reason to believe that the 
wages paid to a substantial number of such employees are inade- 
quate to supply the necessary cost of Hving and to maintain the 
worker in health. 

Section 4. If after such investigation the commission is of the 
opinion that in the occupation in question the wages paid to a sub- 
stantial number of female employees are inadequate to supply the 
necessary cost of living and to maintain the worker in health, the 
commission shall establish a wage board consisting of not less than 
six representatives of employers in the occupation in question and 
of an equal number of persons to represent the female employees in 
said occupation, and of one or more disinterested persons appointed 
by the commission to represent the public, but the representatives of 
the pubhc shall not exceed one half of the number of representatives 
of either of the other parties. 

Section 5. The commission may transmit to each wage board 
all pertinent information in its possession relative to the wages paid 
in the occupation in question. Each wage board shall take into consid- 
eration the needs of the employees, the financial condition of the oc- 
cupation and the probably effect thereon of any increase in the mini- 
mum wages paid, and shall endeavor to determine the minimum 
wage, whether by time rate or piece rate, suitable for a female em- 
ployee of ordinary ability in the occupation in question, or for any 
or all of the branches thereof, and also suitable minimum wages 
for learners and apprentices and for minors belozu the age of 
eighteen years. When two-thirds of the members of a wage board 
shall agree upon minimum wage determinations, they shall report 
such determinations to the commission, together with the reasons 
therefor and the facts relating thereto, and also the names, so far as 
they can be ascertained by the board of employers who pay less than 
the minimum wage so determined. 

Section 6. Upon receipt of a report from a wage board, the 



LABOR PROBLEMS 483 

commission shall review the same, and may approve any or all of 
the determinations recommended, or may disapprove any or all of 
them, or may recommit the subject to the same or to a new wage 
board. If the commission approves any or all of the determinations 
of the wage board it shall, after not less than fourteen days' notice 
to employers who pay a wage less than the minimum wage approved, 
give a public hearing to such employers, and, if, after such public 
hearing, the commission finally approves the determination, it shall 
enter a decree of its findings and note thereon the names of employ- 
ers, so far as they may be known to the commission, who fail or 
refuse to accept such minimum wage and to agree to abide by it. 
The commission shall, within fourteen days thereafter, publish the 
names of all such employers in at least four newspapers in each 
county in the Commonwealth, together with the material part of its 
findings, and a statement of the minimum wages paid by every such 
employer. Any employer upon filing a declaration under oath in 
the supreme judicial or superior court to the effect that compHance 
with such decree would endanger the prosperity of the business to 
which the same is made applicable, shall be entitled to a stay of 
execution of such decree, and a review thereof, with reference to 
the question involved in such declaration. Such review shall be 
made by the court under the rules of equity procedure, and if it 
shall be found by the court that compliance with such decree is 
likely to endanger the. prosperity of the business to which the same 
is applicable, then an order shall issue from said court, revoking the 
same. 

Section 7. In case a wage board shall make a recommendation 
of a wage determination in which a majority but less than two-thirds 
of the members concur, the commission, in its discretion, may report 
such recommendation and the pertinent facts relating thereto to the 
general court. 

Section 8. Whenever a minimum wage rate has been established 
in any occupation, the commission may upon petition of either 
employers or employees, reconvene the wage board or establish a 
new wage board, and any recommendation made by such board shall 
be dealt with in the same manner as the original recommendation of 
a wage board. 

Section 9. For any occupation in which a minimum time rate 
only has been established, the commission may issue to any woman 
physically defective a special license authorizing the employment of 
the licensee for a wage less than the legal minimum wage : provided, 
that it is not less than the special minimum wage fixed for that 
person. 



484 READINGS IN ECONOMIC PROBLEMS 

Section 10. The commission may at any time inquire into the 
wages paid to minors in any occupation in which the majority of 
employees are minors, and may, after giving pubHc hearings, deter- 
mine minimum wages suitable for such minors. 

Section 13. Any employer who discharges or in any other man- 
ner discriminates against any employee because such employee has 
testified, or is about to testify, or because the employer believes that 
the employee may testify, in any investigation or proceeding relative 
to the enforcement of this act, shall be deemed guilty of a misde- 
meanor, and upon conviction thereof shall be punished by a fine of 
twenty-five dollars for each offence. 

Section 15. Any newspaper refusing or neglecting to publish 
the findings, decrees and notices of the commission at its regular 
rates for the space taken shall, upon conviction thereof, be punished 
by a fine of not less than one hundred dollars for each offence. 

Section 16. No member of the commission and no newspaper 
publisher, proprietor, editor or employee thereof, shall be liable to 
an action for damages for publishing the name of any employer in 
accordance with the provisions of this act, unless such publication 
contains some wilful misrepresentation. 

Section 18. This act shall take effect on the first day of July 
in the year nineteen hundred and thirteen. (Approved June 4, 
1912.) 

264. The Futility of the Minimum Wage. 

BY J. I^AURKNCK LAUGHUN. 

The hysterical agitation for a minimum wage (today urged 
chiefly for women) has in it no conception of a relation between 
wages and producing power. It is unsound for several reasons 
which touch the very interests of the laborers themselves. 

It introduces a new and unjustifiable basis of wages — that wages 
shall be paid on the basis of what it costs the recipient to live. If 
it is urged, for instance, that a woman cannot live on $5.00 a week, 
but can live on $8.00 and hence her minimum wage should be $8.00, 
the whole case has not been considered. If we accept — what we 
should not accept — the principle that wages should be related to the 
cost of living, and if it is accepted that the woman could live on 
$8.00 a week, on what grounds should she ever receive more than 
$8.00 a week? On what grounds could any one get $18.00 a week? 
At present $18.00 is paid on the ground that it is earned, that is, 
on the basis of a relation between wages and producing power. No 
other basis can stand for a moment in the actual work of industry. 
Men go into business to gain profit ; if, in their opinion, the employee 



LABOR PROBLEMS 485 

is not worth $8.00 a w.eek, she will not be retained, no matter what it 
costs to Hve. If she is worth to the business $18.00, that will be the 
wage. No law can force anyone to remain in a business that does 
not pay. 

The theory of a minimum wage based on the cost of living is 
flatly inconsistent with the facts of daily life and preparation for any 
occupation. At what age or point is a beginner, or apprentice, to 
receive the full legal wage? Is no boy, or apprentice, to be allowed^ 
to receive a partial reward till he is a full-fledged adult workman? 
How about the woman, who, in the economic role of domestic labor, 
knits stockings in odd hours in order to add a little to the family 
income — shall she receive nothing if not the full legal wage ? Shall 
the boy, or even a young lawyer just entering an office, be forbidden 
to receive the small stipend of the preparatory period ? 

Suppose it were required by law to pay shop-girls $8.00 a week 
instead of $5.00 on the ground that the insufficient $5.00 leads to 
vice ; then, since no ordinary business would pay $8.00 unless it were 
earned, those who did not earn $8.00 would inevitably be dropped 
from employment without even the help of $5.00 to save them. If 
$5.00 is no protection from vice, how much less is no wages at all? 
This proposal of a niinimum wage is directly opposed in practice to 
the very self-interest of the girls themselves. 

It is crass to try to remedy wages which are admittedly too low 
by fixing a legal minimum wage, which can never be enforced unless 
private business establishments are to be regarded as state institu- 
tions. In a state factory, wages may possibly be determined by law, 
but not in open competitive business conditions, where the supply 
of labor has as much influence on wages as the demand. If the 
supply of women wage-earners converges on only certain kinds of 
work, wages will be lovv^ered by the very large supply of the workers. 
There is no exit by this door of legal enactment as to the amount of 
wages. 

The true and immediate remedy is the creation of ready means 
by which the industrial capacity of the wage-earning women will be 
increased. The wrong situation — of which low wages, possible 
starvation, and the temptation to vice are only symptoms — is due 
primarily to the fact that women thrown on their own resources 
know no trade and crowd each other in the market for unskilled 
labor. The remedy lies in the creation of places of instruction where 
any woman (no matter how poor) shall be taught a trade and have 
skill given her by which she can obtain a living wage. 

The remedy lies in preventing a congestion of unskilled feminine 
labor by industrial education. There is no other rational or per- 



486 READINGS IN ECONOMIC PROBLEMS 

manent or human way out of the present wretched situation, if we 
have the real interest of the workers at heart — and are not interested 
chiefly in getting some cheap pohtical notoriety. 

This conclusion applies to men as well as to women. Is not a 
skilled carpenter worth more than a blunderer? In any business, 
does not every one agree that it is fair to give a very energetic, live, 
active, skillful salesman more than a stupid? If he is skilled he 
earns more, because he brings in more business. That being settled 
we do not fix his wages on what it costs him to live. He has a right 
to spend his income as he pleases. Hence, if we were to adopt the 
theor)^ of the minimum wage we should be adopting a new theory 
of wages, which would justify the refusal to pay higher wages based 
on efficiency. 

The only real permanent aid to low wages is to increase the pro- 
ductivity and skill of the persons at the bottom. Instead of talking 
of such injurious palliatives as minimum wages, create institutions 
at once where those persons can be given a trade or training for a 
gainful occupation. The cry for a minimum wage is evidence of the 
industrial incapacity, the lack of producing power, in masses of our 
people. The concrete ways of increasing the productive power of 
each man and woman are not unknown. Moreover, the captain of 
industry can introduce carefully worked-out plans for helping his 
operatives to rise in life ; to better conditions by welfare work ; to 
encourage savings and thrift; to introduce the stimulus of profit 
sharing; and above all, establish civil-service methods devised to 
pick out and promote the promising youth so that the path from the 
bottom to the top is open to every employee. Under unrestricted 
competition, there will be seen the inevitable results of 'natural 
monopoly' by which superiority comes to its own, and wages are in 
some proportion to productive power. 

265. Objections to Wage-Settlement by External Authority. 

BY S. J. CHAPMAN. 

The fundamental objection to the settlement of wages by external 
authority is easily formulated. New needs are constantly arising; 
and it is partly by the spontaneous emergence of uew needs, changes 
in the proportions of needs, and the satisfaction of new demands, 
that society progresses. It will not be inferred from this statement, 
of course, that caprice and vacillation in demand are good. It is 
to the immediate gain of the community that production should 
react speedily upon the fresh calls made upon it, since thereby the 
most satisfaction is elicited from a given quantity of producing 



LABOR PROBLEMS 487 

power. Further, it is to the ultimate advantage of the community 
that this rapid response of society on its productive side to society on 
its consumption side should be forthcoming, since thereby imagina- 
tion is quickened and the way is laid open for further progress. By 
the satisfaction of old wants scope is given for the expression of 
new wants. Progress does not mean merely change of wants, apart 
from the character of the change, but change is so essential as to be 
a presupposition of progress. The general disappointment of aspira- 
tions saps social vitality. Again, a great economy results from inter- 
national specialism following the divisions marked out by national 
differential advantages for the production of certain goods. These 
relative advantages are variable, and therefore the industries of a 
country with much foreign trade will wax and wane relatively if the 
results are to be procured from its productive power. 

Now rapid alterations in the industrial field, in response to the 
varying circumstances that we have outlined, can be secured only if 
public demand is transferred direct to capital and labour through the 
medium of the employers' demand for them. If it is, the industry 
that should contract naturally contracts because it offers small profits 
and wages below the normal level, while the business that should 
expand naturally expands on account of its exceptional remuner- 
ativenessto all factors which engage in it. Once unlink the existing 
close connections between pubhc demand and wages, and a large 
proportion of the nation's productive power will be regularly mis- 
applied, unless or until settlement at comparative stagnation is 
induced. Moreover, the best will not be made of the aptitudes and 
tastes of the individuals of whom society is composed. No arbitrator 
can in the nature of things possess sufficient knowledge of the 
demand for, and supply prices of, labour to enable him to declare the 
relative wages that are best in the long run for the community as a 
whole. The chances are that in many of the awards seribus mistakes 
will be made; after some time, it is true, the awards are revised, but 
it is then too late for all the damage inflicted to be repaired, and there 
is again no surety that the errors will be corrected. This is no plea 
for stringent laisser f air e ;.Sta.te intervention in the interests of life 
and health, and combinations to render more effective the bargaining 
power of labour and the demand of labour for pleasant conditions, 
are quite different in principle from the surrender to courts, which 
can never have before them the data to enable them to do the right 
thing in the settlement of relative remunerations as between the 
numerous classes of labour and other factors in production. To 
use an analogy, the problem is to deduce from a person's constitu- 
tion how much food he should take each week for the next six 



488 READINGS IN ECONOMIC PROBLEMS 

months. Who shall say? For who shall deduce from the parts of 
the organism their joint needs now and for the next few months? 
Fortunately, nature solves the riddle by giving to such organisms 
appetite. In the social organism the analogous regulator is to be 
found in individual demands. 

There are two further dangers. The one is that, though some 
State action may give scope to individual initiative — by which we 
advance — another kind of State action may weaken it. The other 
danger arises from the fact that distribution is so linked to produc- 
tion that complexity in the one necessitates complexity in the other. 
If society is incapable of assuming a more intricate system of dis- 
tribution, further complication for the improved economic working 
O'f the productive system is retarded. Industrialism is relatively 
simple in form and limited in extent in the Australasian Colonies. 
Agriculture is the chief occupation, and this being untouched by the 
arbitration laws is a vent for any labour or capital driven out of the 
industries. Hence the settlement of wages by boards with power 
may not very seriously diminish prosperity. But it would in a 
country with more involved productive arrangements, where the 
loophole of escape -from onerous decisions was less adequate. Pro- 
gress would be impeded until the artificial system, was repudiated, 
and the old lesson that had been forgotten of the self-settlement of 
wages under simple conditions had been learnt afresh. 

Besides, lastly, there is the unwholesomely close association be- 
tween politics and self-interest. What would be the state of democ- 
racy in the next generation if wage-earners regarded the govern- 
ment as one of the chief arbiters of wages, as they might easily do 
when, according to their experiences, wages had been settled, as a 
rule at least, if not invariably, in a Court, State instituted and State 
supported, the awards of which were enforced by the State? 



H. INDUSTRIAL INSURANCE. 
265. The Problem of Social Insurance. 

BY WILLIAM F. WILLOUGHBY. 

In a broad sense all forms of insurance may be described as 
social insurance, since social ends are attained by them. As the 
term is now employed, however, it is usually restricted to those 
forms of insurance having to do with contingencies affecting indi- 
viduals as opposed to those affecting property. It looks to the con- 
ferring of pecuniary benefits in all those cases where for any reason 



LABOR PROBLEMS 489 

the capacity of the individual to provide for the support of himself 
and those dependent upon him is lessened or destroyed. Stated in 
another way, social insurance sets to itself the task of meeting the 
problem of the economic insecurity of labor. 

Now what are the contingencies causing this economic insecurity, 
against which provision must be made in some way? On examina- 
tion we find that a man's ability to support himself, and to make due 
provision for those dependent upon him, is lessened or cut off: 
( I ) by his meeting with an accident incapacitating him, temporarily 
or permanently, partially or completely, from labor; (2) by his 
falling sick; (3) by his becoming permanently disabled for labor 
as the result of old age or failing powers; (4) by his death, leaving 
a widow, children, or others without adequate means for their 
support; and (5) by his inability to secure remunerative work. 

To meet each of these contingencies resort has been had to the 
principles of insurance. Social insurance is thus a term that has 
been coined to serve as a collective designation of : ( i ) Insurance 
against accidents; (2) insurance against sickness; (3) insurance 
against old age and invalidity ; (4) insurance against death, or, as it 
is more usually called, life insurance; and (5) insurance against un- 
employment. 

Could a just and workable plan of insurance covering these 
several points be worked out, the problem of the economic security 
of labor, one of the greatest with which society now has to deal, 
would be solved. Is there any social problem more fundamental or 
more deserving of unremitting effort? 

Our first analysis thus resolves the problem of social insurance 
into these five branches. This division is made not merely in order 
to bring out the content or orbit of social insurance. It is funda- 
mental, since each of 'these branches of insurance has its own special 
features and problems. Insurance, notwithstanding the simplicity 
of the ideas underlying it as a device, is an exceedingly technical 
science. Particularly is this true where the human factor has to be 
dealt with. Still more is it complicated where a departure is con- 
templated from the system of purely voluntary, unencouraged, 
unaided use of the device on the part of individuals, and resort is 
proposed to the force of social encouragement, control and con- 
pulsion. Each of these five branches of social insurance thus has its 
own special problems and considerations ; they are united only in 
respect to their ultimate social end. 

These special problems can, in each case, be distinguished, for 
purposes of consideration, into three distinct classes: (a) the social, 
(b) the administrative, and (c) the technical. Of these the first is 



490 



READINGS IN ECONOMIC PROBLEMS 



the most fundamental. Under this head falls the great question of 
upon whom shall fall the burden of making the contributions re- 
quired for the support of the system. No real progress can be made 
until we, the public, have reached a conclusion regarding the problem 
of justice that is here involved. As a matter purely of right, of 
justice, of bringing about the widest possible distribution of welfare, 
how shall the financial burden entailed by the system be distributed ? 
In seeking to reach an answer to this question we find that the choice 
lies between placing the burden in whole or in part upon either : 
(i) the beneficiary, or workman, (2) the employer, (3) the industry 
in which the workman is employed, or (4) the state. 

267. Theory of Negligence in Employers' Liability. 

BY le;e; k. frankei, and mile;s m. dawson. 

Let us consider the principles which, only a quarter century ago, 
determined the right of a workman to recover compensation from 
his employer. Those principles still apply, with some modification, 
in all the states of the United States, and have but recently been 
discarded in part by the federal government itself. The elementary 
theory of "the law of negligence," as it is usually called, in its rela- 
tion to the liability of employers for financial loss to workmen and 
their families, was originally the same in all civilized countries. The 
development of the law of liability has not been identical in every 
country, but nowhere, probably, has the principle been pushed so far 
as in the United vStates. The doctrine has, however, been modified 
somewhat b}^ decisions of the courts and by act of our legislatures. 

The underlying principle of the law of negligence is that the 
employer is liable only in case he is at fault; that is, he must have 
been neglectful in some respect and this negligence must have been 
the proximate and sole cause of the accident. In that case it declares 
that he alone must bear the financial burden of compensation. 

Liability of the employer for his own negligence is qualified as 
follows : 

First, it is not enough that he zvas the chief cause. 

If the employe himself has been negligent and if this in any 
degree contributed to the accident, the employer is not held. This is 
known as the principle of "contributory negligence." The idea is 
that the courts, not being able to separate results flowing from these 
two causes and to determine how much w^as due to one and how much 
to the other, v/ill refuse to grant compensation if the employe's negli- 
gence contributed to the accident even though only in a slight degree. 



LABOR PROBLEMS 



491 



Second, the accident must not have been a consequence of the 
ordinary risks of the occupation. 

If it can be shown or the conclusion fairly be deducted that the 
employe assumed this particular risk as a condition of his contract 
of employment, or as the ordinary risk of his occupation of which 
he knew or was bound to know, the employer is not held. If the 
employe was aware that a certain danger existed and notwithstanding 
continued to work, this action on his part would bar recovery. As 
a corollary to this, the courts have held very generally that the em- 
ploye must be presumed to know what are the ordinary dangers of 
his occupation, and even what are the unusual dangers connected 
with continuing to perform the duties of that occupation, when the 
place where it is carried on, or the machinery or tools with which it 
is carried on, are defective. 

This is called the principle of "assumption of risk." Some courts 
have gone so far as to hold that, even though the employer is required 
by law to keep the machinery, tools, and the place in which the work 
is done in a certain condition of safety, and that although by faiHng 
to do so he has rendered himself liable to a penalty, the workman, 
notwithstanding, will not be able to recover if he has known of these 
defects and has nevertheless continued to work. The same courts 
have also held that the fact that he has called the defects to the 
attention of his employer and asked that they be remedied, will not 
render the employer liable if the workman, notwithstanding that the 
defects have not been remedied, continues to work. In fact, calHng 
the defects to the attention of others prejudices his claim in that it 
is proof positive that he knows of them. 

Third, tJie accident r.uist ha^i'e been the result of the employer's 
ozi'u negligence and not that of another employe or employes. 

If the workman has been injured because one or more of the 
employes working with him were negligent, the employer will not be 
held. This proceeds from the idea that each workman whose negli- 
gence has caused the injury should himself be held financially re- 
sponsible; and since in most cases he is in fact financially irrespon- 
sible and could not respond to a judgment, the result of the applica- 
tion of this rule is that the persons injured are not compensated at 
all. This is directly contrary to the rule which applies when the 
injury is to one not an employe; in that case the employer, under the 
general doctrine of principal and agent, is held liable. 

The principle stated above is known in practice as the "fellow 
servant" rule. It has been carried so far by some courts that it is 
difficult to see how a corporation employer could be held responsible 



492 READINGS IN ECONOMIC PROBLEMS 

at all, no matter what officer or other employe was negligent. Even 
an officer is an agent or employe, and therefore a fellow servant with 
all other employes, although the courts have usually not so held. 
Except in the case of executive officers, however, the rule has been 
appHed so sweepingly that, for instance, a scrubwoman washing out 
railway coaches might be held to be a fellow servant with the super- 
intendent of the road, and, therefore, without a good claim against 
the company for negligence attributable to him. 

The "fellow servant" rule grew up in the courts out of the 
simplicity of the common law, which in its origin did not know 
employers and employes in the modern industrial or commercial 
sense, but only "masters" and "servants." The law did not hold 
the master liable, even on the ground of negHgence. It certainly 
would have refused to require him to compensate one servant for the 
negligence of another. This principle manifestly has little or no 
suitability for the uses of a commercial and highly organized indus- 
trial community, in which much the larger part of the service per- 
formed by employes is not for the direct enjoyment of the employer 
but is part of the aggregate cost of products or services sold by him 
to the public at a price to cover all the costs. In recent years the 
"fellow servant" rule has been much relaxed, first by the courts 
and later by legislatures. In many states an employe who super- 
vises the work and controls the workman is held to be a "vice- 
principal" and to represent the employer, so that his negligence is 
treated as if it were the negligence of the employer. 

Under the rules of law just outlined, a very large proportion of 
the accidents which occur in the industries of the country go uncom- 
pensated. In some cases, on the other hand, the employer is held 
for substantial amounts, and occasionally very large verdicts are 
recovered, but in only a small percentage of the cases is the com- 
pensation adequate. 

268. The Responsibility for Industrial Accidents. 

An excellent commentary on the responsibility for industrial 
accidents is furnished in the two paragraphs which follow. The 
first is from an official bulletin of a railway company, the second is 
from a letter of instruction to employees by the same company. 

Employes before they attempt to make couplings or to uncouple, 
will examine and see that the cars or engines to be coupled or un- 
coupled, couplers, drawheads, and other appliances connected there- 
with, ties, rails, tracks, and roadbeds, are in good safe condition. 



LABOR PROBLEMS 493 

They must exercise great care in coupling and uncoupling cars, in 
all cases sufficient time must be taken to avoid accident or personal 
injury. 

Entirely too much time is being lost, especially on local trains, 
due to train and enginemen not taking advantage of conditions in 
order to gain time doing work, switching and unloading and loading 
freight. Neither must you wait until train stops to get men in 
position. It is also of the utmost importance that enginemen be 
alive, prompt to take signals, and make quick moves. In this 
respect it is only necessary to call your attention to the old adage, 
which is a true one, that when train or enginemen do not make good 
on local trains it thoroughly demonstrates those men are detrimental 
to the service as well as their own personal interests, and such men, 
instead of being assigned to other runs, should be dispensed with. 
I am calling your attention to these matters with a view of invigorat- 
ing energy and ambition, in order that your families who are depend- 
ent on you to make a success shall not some day point the finger of 
scorn at you, and that the public may nat be able to say you lost your 
position due to lack of energy and interest in your own personal 
welfare, for which you can consistently place the responsibility on 
no one but yourself. 

269. Impossibility of Fixing Responsibility for Industrial Acci- 
dents. 

BY P. T. SHERMAN. 

In the highly organized and hazardous industries the real cause 
of accidents are generally so complex and in addition often so remote 
that it is impossible by any method or means correctly to ascertain 
the facts necessary to form a correct judgment of their particular 
causes ; to a yet larger proportion it is practically impossible to do 
so without such expense and delay as will defeat justice; and to 
those accidents, as to which the necessary facts are practically ascer- 
tainable, there is no simply abstract term, such as "carelessness," 
"negligence," "fault," "gross negligence," which if used as a criterion 
of legal liability, will not result in frequent and gross injustice and 
inequality, whether administered or applied by courts and juries, 
or by more competent experts. The idea of ascertaining the facts 
as to each particular industrial 'accident and then determining liability 
according to the application of those facts to some simple abstract 
rule cannot be carried out in practice. 



494 READINGS IN ECONOMIC PROBLEMS 

270. The Employer's Interest in Workman's Compensation. 

BY HAL H. SMITH. 

A cursory reference to the history of the defenses of contribu- 
tory neghgence, assumption of risk, and fellow servant rule, will 
indicate how strong has been the feeling of their injustice, and how 
much they have already been compelled to yield, in the few short 
years since they were first enunciated, to the pressure of public 
opinion voiced by the employees and their sympathizers. 

But the employees have not been the only ones who have attacked 
the Common Law rules. The employers have seriously criticised 
others of its provisions. Particularly have they called attention to 
the fact that the rule of damages that obtains in Michigan and other 
states in actions arising out of the death of a workman is unjust and 
unfair. 

It will be recalled that an action for negligent death did not exist 
at all till the passage of Lord Campbell's Act in England in 1846. 
This act was shortly thereafter adopted in Michigan. It gave a 
right of action to the parties injured by that death, that is, to the 
widow and the next of kin, and the damages were such as a jury 
should deem just and fair with reference to the pecuniary injury 
resulting to the wife and next of kin from such death. 

It is surprising, however, that it was not until the year 1885 that 
the legislature of Michigan, — and we use Michigan as an example 
because the growth of the law was not far different in other states — 
declared that an action for negligent injuries to a person survived 
his death. This act of 1885 is called the Survival Act. Strange to 
say it was several years before any advantage was taken by litigants 
of this act. But in 1903 the Supreme Court of this state had before 
it a case involving this statute and there laid down the rule that in 
estimating the damages the jury should consider "the earning ability 
of the injured person and the length of time he would probably have 
lived had he not been injured." 

This is the measure of damages where the injured party sur- 
vives the injury, but dies from the results; and these damages sur- 
vive to his estate and are therefore distributed without reference to 
the dependency of the heirs of the injured, and, of course, are not 
measured in any respect by the loss to the person who finally benefits 
in the action. Employers have charged that this measure greatly 
enhances verdicts, and, insofar as it does not permit a deduction by 
reason of any expenditures that the deceased might have made dur- 
ing his lifetime, and does permit a multiplication of his annual wage 



LABOR PROBLEMS 495 

by the period of his expectancy, it opens the way to exorbitant and 
ill advised verdicts. 

Of course these defences and the rule of damages to which 
reference has been made are corallaries of the fundamental rule 
of the Common Law that the negligence of the master is the test 
of recovery by the servant. But it is doubtful whether this rule 
would have been attacked unless in its application through these 
defences and with this rule of the measure of damages, the pro- 
cedure of the courts had become clogged, warfare had been created 
between the judge and jury, sympathetic verdicts had been encour- 
aged and the whole method of the administration of the law in this 
particular had become burdensome and expensive. 

It would appear, therefore, that the Workmen's Compensation 
Acts are a revolt against method as much as against principle. Per- 
haps it would be better to put it that the revolt against principle 
would not have come for many years, perhaps not at all, unless the 
method of enforcement of the common law rules had not stirred the 
workmen, on the one hand, by its inefficiency and the emploA'er, on 
the other hand, by its waste. 

271. The Necessity of Employer's Liability. 

BY ADNA P. WEBER. 

It must be clear, upon reflection, that the conditions under which 
modern industry is carried on preclude the possibility of explaining 
every accident by somebody's negligence. This much was dimly 
understood when various countries took the first step of shifting the 
onus probandi from employee to employer. If, now, the employees 
are not to blame for the innumerable injuries to which they are sub- 
ject, why should they be made to bear the financial burden of those 
injuries? Why should not that burden be distributed over the 
community instead of being concentrated upon a certain number of 
families who, in any event, will have to bear the physical and mental 
suffering involved in the death, crippling, or maiming of men ? The 
risk of fire is undeniably greater in a gunpowder mill than in a 
brewer}^, but the owner of the mill does not bear the burden by 
contenting himself with lower profits than the brewer's; he simply 
pays for the greater risk by higher rates of fire insurance and passes 
the cost on to the consuming public in a higher price for his product. 
If the additional expense imposed upon a gunpowder manufacturer 
through the more frequent losses by fire can be thus recouped from 
consumers, why should not the expense of indemnifying his work- 
men for accidents be likewise made a part of the cost of production, 



496 READINGS IN ECONOMIC PROBLEMS 

and thereby be transferred to the community at large? Only one 
thing will prevent such shifting of the burden, and that is the ability 
of competitors to put their goods on the market without incurring 
like charges. Hence the law must require all competitors in a given 
trade to make the same compensation for the same injuries. This is 
what Europe has done ; by compelling employers to compensate 
injured employees according to a fixed scale, it has taxed the com- 
munity, through higher prices of goods, for the support of its in- 
jured members. 

Many minds bred in the philosophy of individualism will un- 
doubtedly see in such legislation nothing but injustice to the em- 
ployer. In reality such legislation is in strict conformance with the 
innermost spirit of English and American common law. It recog- 
nizes the existence of undeserved distress among workingmen and 
undertakes to alleviate their suffering by giving them a claim upon 
some person who is pecuniarily responsible. And that is precisely 
the principle embodied in the time-honored common-law rule that 
the principal is liable for the acts of his agent. 

The course of reasoning thus followed to justify the principal- 
and-agent theory of liability also justified the workmen's compensa- 
tion acts adopted by all the leading countries of Europe, which . 
require the employer to assume all the risks of the employment 
which he calls into being. But while the employer makes the prim- 
ary payment, just as he pays for the wear and tear of his machinery 
or the loss of his plant by fire, the consumers ultimately pay the 
cost. The alternative to such a general distribution of the financial 
burdens of industrial accidents is the present method, by which the 
entire burden is put primarily upon the poorest classes, and when it 
crushes them, to the damage of the community, is at last tardily 
assumed by the latter through the public charities. 

272. The Necessity for Insurance against Illness. 

BY HENRY R. SEAGER. 

The countries which have taken the lead in protecting their wage 
earners from the losses due to industrial accidents, Germany and 
the United Kingdom, have also grappled with the grave social prob- 
lem presented by illness. Even before organizing machinery for 
compulsory insurance against accidents, Germany made insurance 
against illness compulsory.' Under the present law, all employers 
and all wage earners in the Empire are required to make contribu- 
tions to illness insurance funds. Employers contribute one-third and 



LABOR PROBLEMS 



497 



employees two-thirds toward the premiums which experience has 
proved to be necessary for this purpose. Out of. the illness insur- 
ance funds necessary medical and hospital treatment is provided for 
all wage earners v^dio fall ill, and regular allowances proportioned to 
wages are paid so long as the incapacity to earn wages continues. 
In the event of death, burial expenses are paid, and changes in the 
law now under consideration will soon provide pensions for widows 
and orphans. 

In the United States we are still so far from considering illness 
as anything beyond a private misfortune against which each indi- 
vidual and each family should protect itself, as best it may, that 
Germany's heroic method of attacking it as a national evil through 
governmental machinery seems to us to belong almost to another 
planet. Yet illness, like other evils, to which all are exposed but 
which many escape, should be provided against by some method of 
insurance. 

In the case of clearly defined occupational diseases the cost of 
this insurance may properly be imposed on the employer, who may 
be relied upon to add it to his expenses of production and pass it on 
in higher prices to consumers, who should pay it along with the 
other expenses necessary to the gratification of their wants. Every 
encouragement should be given to trade unions and other voluntary 
association of wage earners to provide sick-insurance to their mem- 
bers, and such fraternal insurance should be as carefully supervised 
by the state in the interest of policy holders as are commercial in- 
surance companies. 

Experience indicates that voluntary insurance will not be paid 
for by those who need it most. No complete solution of this prob- 
lem can be attained without making insurance against illness obliga- 
tory in some such way as Germany and several other European 
countries have done. 

In advocating workmen's compensation for industrial accidents 
and obligatory illness insurance, I have said nothing as yet about 
the reaction of these policies on accident and illness prevention. 
It is here that we have one of the strongest arguments in their favor. 
Accidents and illness are largely preventable. Requiring employers 
to compensate the victims of all accidents inspires them with a zeal 
for accident prevention that they can hardly be expected to display 
under our system of employers' liability. In a similar way, requir- 
ing all persons who may be well to contribute to funds for the relief 
of those who are ill gives every one a new interest in the problem 
of national health. Our life insurance companies are already doing 



498 READINGS IN ECONOMIC PROBLEMS 

much to keep down the death rate. If we were all under the neces- 
sity of insuring ourselves against illness as well as death, it will be 
appreciated what a lively interest we should develop in the health 
of our neighbors. 

273. The British National Insurance Bill. 

BY WARRUN S. THOMPSON. 

The British National Insurance Bill is England's most momen- 
tous piece of social legislation, if indeed it is not the world's. It is 
largely the result of an extended visit which Mr. Lloyd-George made 
to Germany in 1908. Pie left Germany fully convinced that national 
insurance was the proper method of dealing with the conditions 
which the reports on the Poor Law showed to stand in dire need of 
immediate alleviation. The .significant part of the bill is that which 
deals with health insurance. Only that part will be discussed here. 

Under the provisions of the part relating to health all wage- 
earners who receive less than ii6o annually, are compelled to insure 
their health. Those exempted are for the most part in Government 
employ, and already entitled to benefits, and those who are not 
dependent upon their work as their chief means of livelihood. The 
best actuaries estimate that about 9,200,000 men and 3,800,000 
Avomen will become members of "approved societies" when the law 
goes into efir'ect. It will be six months before any benefits are 
granted and two years before anyone will receive "disablement" 
benefits. 

The contributions are payable weekly. They are divided be- 
tween the employer, the workman, and Parliament, as follows: for 
the men, the employer pays 3, the workman 4, and Parliament 2, out 
of a total of 9 pence ; for the women, the employer 3, the workman 
3, and Parliament 2, out of a total of 8 pence. Special provision is 
made in the case of those who receive very low wages for the 
employer and Parliament to pay either the entire contribution or all 
of it but 1 penny. The employer is held responsible for the pay- 
ment, both of his own contribution and that of the employee. The 
payment is made by the use of stamps and the employer is author- 
ized to deduct the employee's contribution from his weekly wage. 

There are five benefits to be given: (i) Medical benefit. This 
includes medical attention and the necessary drugs when one is ill, 
and may be extended to the dependents of the injured person when 
the authorities have the means and deem it advisable. (2) Sana- 
torium benefit. This entitles a member who has tuberculosis or a 
similar disease to be treated in a sanatorium when it is needed. 
This benefit also may be extended to the dependents of the injured 



LABOR PROBLEMS . 499 

person. A definite amount, i shilling 4 pence is available for each 
member annually for the payment of this benefit. This amount must 
not be exceeded unless the local authorities and the Treasury vote 
extra aid. (3) Sickness benefit. This is a cash payment made 
weekly to the insured person or his dependents and continues for 
26 weeks. In the case of men it is 10 shillings a week for the first 13 
weeks and 5 shillings for the second 13 weeks; in the case of women 
7 shillings 6 pence for the first 13 weeks and 5 shillings for the 
second 13 weeks. If the financial condition of the society permits, 
the benefits for the second 13 weeks may be increased. (4) Disa- 
bility benefit. This is a weekly payment of 5 shillings to a member 
who is temporarily or permanently disabled as the result of sickness 
or accident not in any way connected with his work. It lasts ''so 
long as he is rendered unfit by the disease or disablement." (5) 
Maternity benefit. This is a lump sum, of 30 shillings paid upon the 
birth of a child, either when the mother herself is insured or when 
she is the wife of an insured man. In addition to these, other bene- 
fits may be granted, if the financial condition of the society permits 
it. The benefits are decreased when the person is in arrears with his 
contribution, when he is under age and not married, and when he 
is past 50 at the time of becoming insured. 

If a person is not so employed as to become a regular member, 
he may join a society as a voluntary contributor. The rate at which 
he pays is determined by his age at entrance. iVdequate provision is 
made to allow the transfer of a member from the voluntary to the 
employed rate and vice versa. Since there is no contribution from 
the employer in the case of a voluntary member, this amount must be 
paid by the member. The contribution from Parliament is the same 
as in the case of the regular member, and the benefits he receives 
are the same. 

A deposit contributor is one who cannot obtain admission to an 
approved society either as an employed or a voluntary contributor. 
He deposits his savings in the post office in a manner similar to our 
Postal Savings Bank system. From his deposit, after it is subsi- 
dized by Parliament, the proper amount is deducted to entitle him 
to medical and sanatorium benefits. For the other benefits he can 
merely withdraw the remainder of his .subsidized deposit. 

There are two separate organizations for the administration of 
benefits. A local Health Committee is established for each county 
and county borough. This committee in conjunction with the local 
authorities already existing administers the medical and sanatorium 
benefits. The other benefits are administered by approved societies. 
The reason for this division of labor is that Friendly Societies, hav- 



500 . READINGS IN ECONOMIC PROBLEMS 

ing millions of members, already give benefits of various sorts. It is 
intended not to interfere with the other activities of these societies, 
but to have them estabhsh separate branches to administer the re- 
maining health insurance benefits. Any society which does this may 
become an approved society, provided it is not carried on for profit 
and is subject to the control of its members. The approval rests 
wath the Insurance Commissioners. 

Many details of the scheme are fully set forth in the bill, but 
many others are left to the Insurance Commissioners. Their rules 
and regulations are, of course, subject to the approval of ParHament. 
Strange as this delegation of legislative power seems, there is little 
doubt that it will contribute much to the initial success of the 
scheme. The commission will be able to adapt many of its regula- 
tions to exigencies as they arise and thus correct at once many of 
the defects which are bound to appear upon the launching of this 
mighty scheme. 

274. Industrial Insurance and Individual Initiative. 

BY LORD ROBERT C^CIL,. 

If you once make the State a partner in private enterprise, it 
means the absorption of that private enterprise by the State. I 
believe that to be a principle which scarcely requires to be defended. 
If you want to see it in full operation, you have merely got to look 
at the history of the voluntary schools of this country. A partner- 
ship was created between the State and the voluntary schools in the 
matter of elementary education in 1870. What has been its history 
since then? Every decade has seen a further advance of the State 
and a further retirement of the voluntary principle, until at the 
present time the State schools are all compulsory, all free, and 
practically they are absolutely under the control and management of 
the State. The voluntary principle has practically expired. There- 
fore, anyone who considers the history of the voluntary schools 
under the legislation which began in 1870 will see what will inevit- 
ably happen to the friendly societies under the legislation which has 
now begun. More than that, the voluntary schools have been kept 
alive by a strong religious sentiment. You have no such sentiment 
to keep alive "friendly societies." Depend upon it, this Bill when it 
passes is the death warrant of the "friendly societies" of this 
country. 

Finally — and this is the one reason which moves me most of all — 
I regard it as a verv dangerous precedent to liberty and inde- 
pendence in this country, and that, undoubtedly, is the backbone of 



LABOR PROBLEMS 



501 



the agitation against this Bill. This is not a question of particular 
figures, or of particular discussion, or of argumentative leaflets, 
or whether this or that person pays. The backbone of the agitation 
is that the people bitterly resent in this country being made to apply 
their own money for the benefits in a way they do not approve. It 
is defended by the German example; but that example is wholly 
irrelevant. The whole history of Germany is the history of the 
control of the individual by the State. Frederick William estab- 
lished an elaborate system of State control over the whole lives of 
everyone of his subjects. That has been the history of Germany, 
and that cannot be transplanted to this country without great in- 
jur}^ to the institutions of this country. 

I have a fanatical belief in individual freedom. I believe it is a 
vital thing for this country, and I believe it is the cornerstone upon 
which our prosperity and our existence is built, and, for my part, 
I believe that the civic qualities of self-control, self-reliance, and 
self-respect depend upon individual liberty and the freedom and 
independence of the people of this country. The essence of all 
civic virtues is self-control and self-reliance, and you cannot have 
these without freedom. And it is because I believe that in its 
present form this Bill is a great danger to liberty, that I think it 
is vital it should be further considered, and that the country should 
have a further opportunity oi expressing its opinion upon it and 
of saying whether it desires to have these German shackles put 
upon it, or whether it would not prefer to have a scheme founded 
upon the principle oi liberty and independence. 

275. An Argument for Old-Age Pensions. 

BY IvKE WELUNG SOUIER. 

Approximately 1,250,000 of the people of the United States. 
above sixty-five years of age, are dependent upon public and private 
charity, to the amount of about $250,000,000 annually. One per- 
son in eighteen of our wage-earners reaches the age of sixty-five 
in penury ; and the indications are that the proportion of indigent 
old is increasing. There are no signs of abatement in the causes 
of this deplorable condition,- — ^such causes as misfortune, unem- 
ployment and low wages. 

Strange as it may seem, the United States is the only great in- 
dustrial nation in the civilized world that has not already attempted 
a practical and permanent solution of this problem of old age de- 
pendency. 

It is admitted on every hand, by those who have given careful 



502 READINGS IN ECONOMIC PROBLEMS 

attention to the tendencies of our industrial life, that the state 
must soon make provision for the necessities of those of its citizens 
who come down to old age without sufficient provision for a com- 
fortable, self-respecting- and respectable existence. Publicists and 
economists who see handwriting on the industrial wall of the pres- 
ent age are divided into two classes, which, for convenience, may 
be designated "annuity" and "pension:" the former admiring 
greatly the provisions that have been made by Germany, France, 
Belgium, Denmark and other couutries, by which annuities may 
be purchased by compulsory thrift and occupational and state 
subsidy ; the latter believing in pensions, adopting the philosophy 
that has brought about the enactment of pension laws in Great 
Britain, New Zealand and Australia. 

The annuity class has, up to the present time, seemed to be in 
the ascendancy in the United States, principally because their phil- 
osophv does not violate the fundamental doctrines of individual 
thrift, upon which largely our national prosperity has been built. 
While, on the other hand, the logic of the world movement to- 
war(;ls pensions for old age, instead of annuities, as well as the logic 
of economic reason, points unmistakably tO' the supremacy of the 
pension class as the ultimate solution of this national problem. 

Annuities are bound to* fail for the following reasons : 

First : Annuities purchased, either with or without state aid, do 
not provide for those now dependent or approaching dependency. 
Even if the government were to adopt the scheme, it would be at 
least two generations before all wage-earners could be provided 
for on the annuity plan. 

Secottd: Any annuity scheme that the government might pre- 
scribe by law would in all probability fail to be all-inclusive, just 
as such schemes do in Germany and France, in that they provide for 
contributions or deductions from wages of wage-earners only ; 
whereas, the experience in all nations is that any mem'ber of the 
merchant or moneyed class, who is usually exempted from compul- 
sory contributions, may, in his old age, be even more dependent 
than a member of the distinctive wage-earning class. 

Third : Such a scheme would be unpopular in this country, prin- 
cipally because of the sentiment of individualism and also largely 
because wage-earners, in their youth, object to paying for some- 
thing which they may never receive; and most seriously object to 
being compelled to purchase that which they are unable to buy. 
V'oluntary thrift has failed in this country to avail itself of the many 
opportunities offered for making provision for old age comfort, 
just as it has failed in other countries. Whatever provision is 



LABOR PROBLEMS 503 

made, therefore, in this country for the relief of old age destitu- 
tion must be made through governmental compulsion, either state 
or national. 

Fourth : Anv compulsory contributory scheme contemplates the 
accumulation of such a fund as to make such a scheme utterly 
impracticable from the economic and financial standpoint. 

The solution of the old age dependency problem in the United 
States will not soon be reached by any plan thus far put forward 
by the annuity class of economists. Indeed, in the face of such 
points as are marshaled against it, the annuity proposition, predi- 
cated upon any thrift scheme, may be considered a lost cause in 
this country ; especially is this true when the advantages urged 'by 
the pension class, for the solution they offer, are carefully weighed. 

In its essence, the old age pension scheme is nothing more noT 
less than the nation's acknowledgment of the debt which the pres- 
ent generation owes the survivors of the past generation. Any 
man or woman, who has lived for sixty-five or seventy years, do- 
ing the best possible, under all circumstances, has contributed by 
life and work to the making of the world a better place to live in. 
Every civilized community feels the obligation to provide such a 
one Avith shelter, food and raiment. 

The points to which attention may be called, in the solution of 
the problem offered by the pension class, may be summarized as 
follows : — • 

First : It is manifestly no greater burden, on the community as 
a whole, to operate a government pension system than to support 
the aged dependents on the present system of public and private 
charity. 

Second: The community, as a whole, owes the disabled soldiers 
of the nation's industrial army as tender consideration and ample 
rewards for service as are recognized to be due the veterans of the 
nation's military service. 

Third: A pension scheme established by Congress, and oper- 
ated by the national government, would encourage the mobility 
of labor, destroy the spirit of servility and fear, that now so often 
dominates the wage-earner, and would enhance the stability and 
beauty of home life, in that the aged veteran would be welcome to 
a place of counsel and honor in the family circle, now too O'ften 
denied him. 

Fourth : The operation of a pension system by the national 
government is as scientific, just, and impartial as any annuity scheme 
that has ever been planned or devised. 

It is recognized in all nations which have put a pure pension 



504 



READINGS IN ECONOMIC PROBLEMS 



plan into operation that the wage-earners by incidence have ah-eady 
created, in the general capital for the work and welfare of the 
country, an ec]uivalent of the funds necessary to give them of right 
a support in their old age. They may not have paid taxes on land 
or invested funds ; but, as tenants, the taxes on the property they 
occupied were really paid by them, and as laborers in the employ 
O'f that capital which paid taxes levied on invested funds, their 
wages were drawn upon in due proportion. 

To the objection that such an old age pension scheme would be 
detrimental to the thrift habit, it is sufficient to reply that in all 
other countries where the government has inaugurated old age 
pensions there has been no indication that the people in conse- 
quence are less thrifty, self-reliant or provident than they were 
before the pension scheme was inaugurated. 

The objection that springs most spontaneously to the lips of the 
Avell-to-do, who may be opposed to old age pensions because such 
schemes impty an increase of taxation burdens, is this : Is it 
proposed that I, who have been provident, frugal, temperate and 
thrifty, shall pay for the support of the loafer and criminal? This 
objection is met ver}^ readily by inquiring hovv the good and suc- 
cessful citizen is now absolved from the burden of providing for 
the support of his slothful or criminal neighbor. All correctional, 
reformatory, and relief institutions are largely maintained by the 
tax-paying portion of the comaiiunity. The improvident profligate, 
even if placed in an asylum or other institution, according to his 
mental or physical necessities, is. nevertheless, supported bv the 
honest, faithful taxpayer. 

In every other country where such a scheme has been inaugur- 
ated, it is acknowledged by all classes and parties that it has come 
to stay, — because it ought to stay. Encouraged by this universal 
testimony of approval in every countr}^ of its adoption, the advo- 
cates of the old age pension principle in this country are confident 
that the time is opportune for pressing the campaign for its inaug- 
uration here. Present social, industrial and econoinic conditions 
point inevitably to old age pensions as the best possible solution 
of the problem of old age dependency in the United States. 

276. Old-Age Insurance in New Zealand. 

r.Y W. p. RKEVIJS. 

Though dire poverty in New Zealand is almost confined to the 
aged, to disabled workers, to deserted wives and children, still 
even the Fortunate Isles have not escaped the cause of pauperism. 



LABOR PROBLEMS 505 

The State has not only to provide hospitals, but also to furnish 
what in the colonies is called Charitable Aid. Even under a liberal 
system of poor relief pauperism is keenly felt by the better class 
of the aged poor. Hence public opinion was quite ready for the 
proposal of an Old Age Pension Law. 

When such a law was at length proposed, opposition to it, as 
expressed in the debates, seems to have been based on the conten- 
tion that it was likely to burden the colony needlessly and increas- 
ingly sap the springs of self-reliance, and tax the thrifty for the 
benefit of the improvident. On behalf of the Act supporters dwelt 
with considerable force upon the ups and downs and inevitable 
accidents of colonial life. They pointed out that in New Zealand, 
as in all countries occupied ^in growing raw materials for Europe, 
times of prosperity are invariably followed by periods of contrac- 
tion and depression, when the savings even of the most thrifty of 
the poorer classes may be inevitably swallowed up in struggling with 
unemployment. Aluch stress was laid upon the uncertainty of in- 
vestments into which work-people are constantly tempted to put 
their small savings. The House was reminded of notorious in- 
stances in which the very thrift of careful workers had led to their 
ruin by exposing them to the calls levied by the liquidators of bank- 
rupt financial companies in which they had invested their money. 
Speakers suggested that the virtues of thrift in the case of married 
work-people might easily be exaggerated, since to bring up a half 
dozen children decently required a breadwinner's whole earnings: 

The act, as finally passed, is not universal. Every deserving 
old man and old woman Avho has lived in the colony for twenty- 
five vears continuously is entitled to a state pension, the maximum 
of Avhich is £18 a year. But the proviso and conditions with which 
the act is hedged about are such that not more than 40 per cent of 
the aged are at all likely to be found entitled to it. Nor did those 
who passed the act intend that any larger proportion should be. 
The full ii8 is paid only to those whose yearly income from all 
source is less than £34. From £34 to £52, £1 is taken ofif for every 
£ of income. Old women have exactly the same title to the pension 
as old men. Applicants must not have been absent more than two 
years altogether from New Zealand during the quarter of a cen- 
tury preceding the application. They must be subjects of His 
Majestv, and, if naturalized subjects, must have been naturalized 
five vears. The would-be pensioner, moreover, must bring evidence 
that he or she for the previous five years has led a sober and repu- 
table life, and is of good moral character. A pensioner may at any 



5o6 RBADINGS IN ECONOMIC PROBLBMS 

time forfeit his pension, if convicted of serious crime, or if proved 
to be leading a drunken, riotous, or spendthrift Hfe. 

The criticisms which have been brought against the act are: 
first, that it permits designing persons to impose on the govern- 
ment ; second, that its cost is too heavy ; and third, that it dis- 
courages thrift. Opponents of the policy have claimed that many 
of the pensioners have wasted in drink money that they should 
have saved. Another complaint has been that children wealthy 
enough to support poor parents without serious inconvenience have 
taken advantage of the Act to transfer this duty to the State. The 
case has been cited of an old couple divesting themselves of their 
property, deeding it toi a daughter who is married, and after this 
applying for a pension. It is said that they now live with the 
daughter on the land that was their own, and drive in a pony- 
chaise once a month to draw the money. 

The cost of the system, two hundred thousand pounds a year, 
is a substantial burden. But times are very good in New Zealand 
just now, and a prosperous colony with a growing revenue can 
afford to be bold. 

On the vexed question of the effect of free pensions upon thrift 
among the poor, it may be pointed out that no contributory scheme 
is perfect. This act certainly does not offer any direct and specific 
encouragement tO' thrift. Yet, so mieager an allowance as a shil- 
ling a day deferred tO' an age which most people do' not reach, 
scarcely offers an inducement likely tO' interfere with the dail}^ 
habits and plan of life of the very poor. People who were thrifty 
before are not likely to he unthrifty now. And, among the lowest 
grade of wage-earners, it is questionable whether thrift is a virtue 
or not. Certainly it would be easier to teach this class to spend 
wisely than to teach it to save. Defects the Act probably has, but 
they are not its essence. It has come tO' stay. 

277. Unemployment Insurance in Belgium. 

BY WARREN S. THOMPSON. 

At the present time unemployment insurance is on a better 
footing in Belgium than in any other nation although as the statis- 
tics show it is entirely inadequate as yet to cope with the situation. 
There are two systems of unemployment insurance in use in Belgium, 
the Liege system and the Ghent system. The Liege system will be 
discussed first because it is the older. 

The Liege System. On July 12, 1897, an addition to the City 
Budget of 1500 francs was proposed for the aid of associations 



LABOR PROBLEMS 507 

which allowed their members out-of-work benefits, (it had been as- 
certained previously that there were a number of trade unions 
which were granting out-of-work benefits). On the 27th of this 
same month the appropriation was approved and it was distributed 
by a committee in 1898. 

A municipal fund was established in 1903 and regulations gov- 
erning the participation in the municipal subsidy were made. The 
chief of these as amended to July, 191 1, are as follows: 

The unemployment must be involuntary, i. e., produced by causes 
independent of the will of the affiliated member. Strikes, lockouts, 
and change of place to^ secure work are counted as involuntary un- 
employment. 

In 1903 cities situated close to Liege were allowed tO' join the 
municipal fund and paid subsidies tO' the fund in accordance with 
the number of affiliated members who lived within their limits. 

The governing coimcil of this fund is composed of aldermen, 
members of the unions and outsiders in such numbers that no fac- 
tion can control it. 

A union or association which wishes tO' participate in the sub- 
sidy must submit all its accounts tO' periodical inspection. It also 
must make all po^ssible provision to keep its members at work and 
see that there is no malingering. 

The subsidy gra.nted by the city varies from 40 to 75% of that 
paid by the unions depending upon the amount of unemployment 
which exists. There are, however, certain definite and reasonable 
limits (from 30-50 francs) beyond which no' member is entitled to 
further aid from the municipal funds within that fiscal year. This 
subsidy is paid in two parts : ( i ) 50% of the first franc of daily 
indemnity of place (where one does not leave his place of resi- 
dence to secure work) granted by the union, and 50% of the first 
10 francs of travel benefit (where one leaves his place of residence 
to secure work) ; (2) 25% of the total assessments of members 
received for the preceding three months. 

In the province of Liege the number of memibers in organiz- 
ations paying out-of-work benefits has increased from 356 in 1898 
to 14,562 in 1909; the assessments of members have increased from 
191 1 fr. 20 to 108,915 fr. 26 in the same length O'f time; and the 
out-of-work benefits have increased from 810 fr. 50 in 1898 to 
211,944 ^r- 5^ in 1909. 

The Ghent System. A special commission which had been 
appointed on Dec. 19, 1898, by the city of Ghent to investigate un- 
employment and recommend means of alleviating distress due to 
involuntary unemployment reported on April 10, 1900. The plan 



5o8 READINGS IN ECONOMIC PROBLEMS 

which they proposed was adopted on Oct. 29, 1900. I will quote 
Mr. Louis Varlez, who is the leader of this movement in Belgium, 
to show the purpose of the Ghent fund. He says, "To every 
worker, man or woman, who has made efforts to fortify himself 
against the consequences of unemployment, whether by collective 
or individual thrift, by union or mutual insurance, or by whatever 
other procedure it may be, the city of Ghent offers its aid and in- 
creases for him the amount which he is able to assure to himself 
by his own efforts when he is in distress because of unemploy- 
ment." 

Here it was found that a number of trade unions were already 
granting out-of-work benefits to their members and the easiest Avay 
to introduce such insurance was to work through the trade unions. 
The Ghent system has several important and distinctive features. 

It does not allow any subsidy for strikes, lockouts, and change 
of residence to obtain work. It adds subsidies, at the same rate, to 
the savings of those who do not belong to a union as it does to 
the out-of-work benefits granted by the unions to their members 
and thus encourages individual thrift. 

The manner in which the Ghent fund supervises the trade 
unions' accounts is almost identical with that of the Tiege fund 
and both have proved very efficacious. The subsidies at Ghent 
are granted entirely upon the basis of benefits granted (assess- 
ments not being taken into account as at Liege) and this keeps the 
expenses of administration at a minimum. In other respects the 
funds are practically identical. 

These few differences, however, have been sufficient to cause 
a g'reat growth of the Ghent system while that of Liege has not 
extended beyond the borders of the province. In weighing the 
respective merits of the two systems it is generally conceded that 
the balance is in favor of the Ghent system' and the reasons indi- 
cated above are the determining ones. 

The Ghent system has grown rapidly. The number of cities 
practicing it has increased from 2 in 1901 to 41 in 1909 ; the num- 
ber of unions affiliated from 26 tO' 364; the number of persons re- 
ceiving benefits, from 2,089 tO' 18,909; the amount of benefits 
granted by the unions and cities together, from $4,660.76 to 
$66,980.09. 

There is no way to tell exactly the growth in actual number of 
people who benefit by this insurance because the number of union- 
ists who were receiving ont-oif-work benefits before the cities 
granted subsidies cannot be ascertained. Mr. Varlez estimates that 
in 1910 there were 100 cities which were contributing to unemploy- 



LABOR PROBLEMS 509 

ment funds, that about 650 unions ' had out-of-work benefits and 
that between 80,000 and 90,000 men, or about two-thirds of the total 
number of unionists, were insured. 

The Work of the State. In the Budget of 1908 the Belgian 
Legislature appropriated 20,000 francs to the Ministry of Industry 
and Labor for aid, (i) to labor agencies for the free use of people 
seeking employment, and (2) for thrift and other funds to provide 
against distress in cases of involuntary unemployment. About 
10,000 francs went to the latter use and institutions O'f the following 
nature were allowed to participate: (i) The municipal unemploy- 
ment insurance funds; (2) Unemployment insurance funds affili- 
ated with the municipal funds; and (3) Legally recognized trade 
union funds maintaining a fund for unemployment and not affili- 
ated with the municipal funds. All of these classes of funds are 
subject to close supervision by the Ministry and thus a further check 
is placed upon misuse and extravagance by the unions. 

The main work of the State in the struggle against the distress 
caused by involuntary unemployment has been in the subsidizing 
of free employment agencies and in gathering information which 
will in time aid greatly in dealing more efficiently with the problem. 

In collecting statistics the Labor Office requires all funds which 
are subsidized to render acco'unts which will show the percentage 
of unemployment which each union has. These accounts show 
that about 2.y% of their members were unemployed all of the time. 
A labor census taken on Oct. 30, 1896, showed 5.4% of the indus- 
trial workers of the Kingdom unemployed. There is a general 
agreement among the most competent authorities that this per- 
centage is too high. Mr. A'^arlez estimates (and it' is accepted by 
Mr. Rowntree) that there are on an average about 3% of the in- 
dustrial laborers out of employment because of lack of work all 
of the time. 

The Belgium Minister of Labor concludes that there is no satis- 
factory information regarding the amount of involuntary unem- 
ployment which exists in Belgium ; but he does not dispute Mr. Var- 
lez's figures as an estimate. 

278. Insurance against Unemployment. 

P.Y WILUAM ?. WILLOUGHBY. 

The experiments that have been made in Switzerland and else- 
where, while they are not sufficiently extensive to furnish con- 
clusive evidence regarding the practicability of insurance against 
unemployement, are fully adequate to bring out the chief consider- 



5IO READINGS IN ECONOMIC PROBLEMS 

ations that must be taken into account in any attempt to organize 
such a system. 

An examination of the nature of the problem of unemployment 
shows that insurance principles are ill suited for its solution. In- 
surance presupposes that the risk involved shall possess twO' char- 
acteristics, — it must be well defined, and it must be the consequence 
of a chance that can be estimated with some degree of certainty. 
The risk of unemployment conforms to neither O'f these conditions. 
It is not well defined, since there is no fixed criterion as to what 
work the unemployed should be required to- accept. It does not 
depend upon calculable chance, because the personal element in- 
volved in seeking and retaining work, to say nothing of the un- 
certainty of the employer's action, enters so largely. Though lack 
of employment is often unavoidable on the part of the Avorkingman, 
the latter's will and energy play such an important part in the mat- 
ter that any attempt to distinguish unavoidable idleness is futile. 
Insurance concerns itself with a risk that can be calculated and 
provided for in advance ; but this cannot be done in regard to lack 
of employment. 

In no case where tried, has the attempt been made to calculate 
risks and to adjust contributions accordingly, or indeed to^ make 
the system self-supporting. Only nominal contributions have been 
required fro-m members, while the great burden of expense has 
been borne by the government and by voluntary contributors. In 
reality, therefore, it is scarcely proper to speak of these institutions 
as insurance organizations. What has been created is really a more 
methodical system of granting relief tO' the unemployed. 

The problem of lack of employment in the factory trades is 
quite different from that in the building trades or among ordinary 
day laborers. It may be confidently stated that any attempt to 
introduce even a modified form of insurance against unemployment 
should follow strictly trade lines. 

This, however, brings us to the consideration of the out-of-work 
benefit features of labor organizations. If unemployment insurance 
should follow trade lines, every argument would seem to indicate 
that such efforts should be made through existing organizations of 
workingmen. The great work done by these organizations in the 
way of aiding their members is well known. In the United States 
a large part of the expenditures of the trade unions likewise go for 
this purpose, though it is not possible to make any exact statement 
of the amount. This method of granting relief possesses manifest 
advantages. The work of unions is not charity but the highest 
order of mutual aid. Labor unions, moreover, are in a peculiarly 



LABOR PROBLEMS 



5^1 



favorable position to assist their members in obtaining work, and 
are able to guard themselves against imposition. Finally, as we 
have seen, unemployment is not a condition beyond the control of in- 
dividuals, and does not happen with a regularity that can be cal- 
culated. Insurance proper affords little room for discretion in 
granting relief, while each case of unemployment should be con- 
sidered upon its particular merits. Labor organizations can exer- 
cise this necessary discretion in a way that is utterly beyond the 
power of a municipal institution. 

The logical conclusion is that in America, at least, provision 
against lack of employment can best be made for the established 
trades by the men themselves through their organizations ; and that 
this provision cannot be made according, to hard and fast insurance 
principles, but must allow for a certain elasticity or discretion in the 
granting of relief, according to the circumistances of each case and 
the amount of funds available for this purpose. 

I. OBJECT AND PURPOSE OF TRADE UNIONS. 
279. The Undemocratic Character of Trade Unions. 

BY CHARLKS W. E^UOT. 

Trades unionism came into being under undemocratic forms of 
government shortly after the new developments of mechanical 
power changed completely the methods and conditions of many 
fundamental industries. The methods of the new trades unions, or- 
ganized to improve the condition of the laboring people, were neces- 
sarily the methods of fighting, violence, and war. The conflicts of 
the employed with the employers were often barbarous and cruel 
on both sides. Nevertheless, the efforts of the unions were gradu- 
ally successful. Through them higher wages and shorter hours 
were procured at a time when no disinterested and humane person 
could doubt that wages were too low and hours too long. This clear 
success gave the working people confidence in the violent methods 
employed. Gradually new policies, looking toward the creation of 
a monopoly of labor in each particular trade by the union of that 
trade, came into use. 

The first is the limitation in the number of apprentices that shall 
be employed in a given trade. This limit of the number is or- 
dinarily far below the number which it would be for the inter- 
est of the proprietor to employ. The object of this limitation is to 
keep down the number of journeymen in the trade, so as to prevent 
the coming into the trade of a number of persons so great as to 



512 READINGS IN ECONOMIC PROBLEMS 

affect the rate of wages. With a similar intention, trades unions 
have in general resisted the introduction of trade schools into pub- 
lic school systems, and have also' been disposed to interfere with 
the work of private or endowed trade schools. The policy of limit- 
ing the number of apprentices flies in the face of the American 
doctrine that education should be free to all, and should furnish a 
useful training for the practice of any art, trade, or profession. 
Moreover, it is a selfish and monopolistic policy without mitigation. 

Furthermore, many unions lay down rules which make it hard 
for a journeyman to become an employer, prescribing, for example, 
that no one shall become an employer until he is prepared to em- 
plo}' a specified nuinber of journeymen. Such rules tend to stiffen 
every class or set oi mechanics or operatives. Each class is hard 
to get into, and still harder to get out of ; so that the true democratic 
mobility between classes or sets of working people is seriously im- 
paired. It is a survival of the fighting times of trades unionism. 
Every fighting organization is compelled to sacrifice in large meas- 
ure the individual liberty of its members. Herein unionism and 
democracy are in absolute opposition. 

Two other monopolistic inventions have, within years com- 
paratively recent, been adopted by trades unionism, the boycott and 
the union label. The boycott is intended to prevent all persons from 
buying, or even handling commercially, articles not made by union 
labor; and the union label is intended to support the boycott, and 
to enable and induce the public to discriminate against articles which 
do not bear the label. The object of both policies is to secure all 
the productive labor in a given trade for union men ; to this end 
articles or goods made by non-union men must find no market. The 
monopolistic aim of these policies is perfectly plain. 

Many unions refuse to handle in their respective trades materials 
made by non-union labor, or coming from factories which are not 
conducted exclusively by union rules. This policy, if carried out 
successfully by a strong union which covers a large area, is capable 
of forcing the manufacturer to unionize his establishment ; where- 
upon the unfortunate consumer is likely to be at the mercy of the 
manufacturer and the union combined. These monopolistic com- 
binations are often entirely successful in the United States, or in 
large parts thereof, particularly in the building trades, and their 
recent successes account for a considerable portion of the great rise 
of prices which has taken place in this country during the last five 
years. 

The manufacturer of plumbers' supplies, for example, makes 
an agreement that he will sell only to jobbers and to plumbers. The 



LABOR PROBLEMS 513 

jobber agrees that he will sell only to plumbers. The plumbers are 
all union men. The owner of a building under construction can- 
not buy plumbers' supplies unless from some independent manufac- 
turer who is not in the combination. If he buys of such an inde- 
pendent manufacturer, the plumbers at work in his building will 
not touch the materials he has bought. In the district covered by 
such an agreement there is noi competition which is really free. 

It would be hard to exaggerate the intense opposition between 
all these monopolistic policies and the individual freedom in edu- 
cation, in family life, in productive labor, and in trade, which is the 
object and end of democracy. The limitation of output is a trades- 
union practice which combines in an unwholesome way a selfish 
unfaithfulness to duty in the individual workman with a deceptive 
notion of philanthropic interest in fellow-workmen. 

Another trades-union doctrine that has had a very unfortunate 
effect on individual character is the doctrine or practice of the min- 
imum wage. In practice that wage turns out to be a uniform maxi- 
mum wage, and it is ordinarily put at a level above the worth of 
the less skillful workmen. This practice is for the pecuniary interest 
of the younger and least skillful workmen, who, as a rule, pre- 
dominate in the union, or at least are its most assiduous members. 
The first effect of this practice is to deprive the younger members 
of a union of all motive for improvement. A youth receives at the 
start the uniform wage, and the veteran who is a member of the 
same union is receiving no more. No' effort on his part can raise his 
wages. The disastrous effect of this policy of the uniform wage 
on the desirable and happy increase of intelligence, efficiency, and 
good will as life goes on, is perfectly apparent. Now a true democ- 
racy means endless variety of capacity freely developed and appro- 
priately rewarded. Uniformity of wages ignores the diversity of 
local conditions as well as of personal capacity, obstructs the am- 
bitious workman, cuts off from steady enuployment those who can- 
not really earn the minimum wage, and interferes seriously with 
the workman's prospect of improving his lot. 

It is high time it should be generally understood that trades 
unionism in important respects works against the very best effects 
of democracy. 

280. An Employer's View of Trade Unions. 

BY ANDRE^W CARNEGIE. 

The influence of trades-unions upon the relations between the 
employer and employed has been much discussed. Some establish- 
ments in America have refused to recognize the right of the men 



514 READINGS IN ECONOMIC PROBLEMS 

to form themselves into these unions, although I am not aware 
that any concern in England would dare to take this position. This 
policy, however, may be regarded as only a temporary phase of the 
situation. The right of the workingmen to combine and to form 
trades-unions is no less sacred than the right Oif the manufacturer 
to enter into associations and conferences with his fellows, and it 
must sooner or later be conceded. Indeed, it gives one but a poor 
opinion of the ^American workman if he permits himself to be de- 
prived of a right which his fellow in England long since conquered 
for himself. My experience has been that trades-unions,, upon the 
whole, are beneficial both to labor and to capital. They certainly 
educate the working-men, and give them a truer conception of the 
relations of capital and labor than they could otherwise form. The 
ablest and best workmen eventually come to the front in these 
organizations ; and it may be laid down as a rule that the more in- 
telligent the workman the fewer the contests with employers. It is 
not the intelligent workman, who' knows that labor without his 
brother capital is helpless, but the blatant ignorant man, wdiO' re- 
gards capital as the natural enemy of labor, who does so much to 
embitter the relations between employer and employed ; and the 
power of this ignorant demagogue arises chiefly from the lack of 
proper organization among the men through which their real voice 
can be expressed. This voice will always be found in favor of the 
judicious and intelligent representative. Of course, as men become 
intelligent more deference must be paid tO' them personally and to 
their rights, and even to their opinions and prejudices; and, upon 
the whole, a greater share of profits must be paid in the day of 
prosperity tO' the intelligent than tO' the ig'norant workman. He 
cannot be imposed upon so readily. On the other hand, he will 
be found much readier to accept reduced coinpensation wdien busi- 
ness is depressed ; and it is better in the long run for capital to be 
served by the highest intelligence, and to* be made well aware of the 
fact that it is dealing with men who know what is due tO' them, 
both as to treatment and compensation. 

281. Purposes of Trade Unionism. 

BY JOHN MITCHKU.. 

In its fundamental principle trade unionism is plain and simple. 
Trade unionism starts from a recognition of the fact that under 
normal conditions the individual, unorganized workman cannot 
bargain advantageously with the employer for the sale of his labor. 
Since he has no money in reserve and must sell his labor immedi- 



LABOR PROBLEMS 515 

atelv, since he has no knowledge of the market and no skill in 
bargaining, since, finally, he has only his own labor to sell, while 
the employer engages hundreds or thousands of men, and can easily 
do without the services of any particular individual, the working- 
man, if bargaining oui his own account and for himself alone, is at 
an enormous disadvantage. Trade unionism recognizes the fact 
that under such conditions labor becomes more and miore degener- 
ate, because the labor which the workman sells is a thing of his 
very life and soul and being. In the individual contract between 
the rich employer and the poor laborer, the laborer will secure the 
worst of it. The individual contract means that the worst and 
lov/est man's condition in the industry will be that which the best 
man must accept. From fiist to last, from beginning to end, always 
and everywhere, trade unionism stands opposed to the individual 
contract. There can be no concession or yielding upon this point. 
There can be no permanent prosperity of the working classes, no 
consecutive improvements in conditions, until the principle is firmly 
and fully established, that in industrial life, the settlement of wages, 
the hours of labor, and all conditions of work, must be made be- 
tween employers and workingmen collectively and not individually. 

Trade unionism thus recognizes that the destruction of the 
workingman is the individual bargain, and the salvation of the 
workingman is the joint, united, or collective bargain. To carry 
out a joint bargain, however, it is necessary tO' establish a minimum 
of wages and conditions which will apply tOi all. By this it is not 
meant that the wages of all shall be the same, but merely that equal 
pay shall be given for equal work. If some are so willing to be 
over-rushed as. to do more than a fair day's work for a fair day's 
wage, or are willing tO' allow themselves to^ be forced into patron- 
izing truck stores, to submit to^ arbitrary fines or unreasonable 
deductions, whereas others would rebel at these impositions, it 
would result that in the competition among the men to retain their 
positions, those whoi were most pliant and lowest spirited would 
secure the work, and the wages, hours of labor, and conditions of 
employment w^ould be set or accepted by the poorest, most cringing, 
and least independent of workers. If the trade union did not insist 
upon enforcing common rules providing for equal pay for equal 
work and definite conditions of safety and health for all workers 
in the trade, the result would be that all pretense of a joint bargain 
w^ould disappear, and the employers would be free constantly to 
make individual contracts with the various members of the unioo. 

The trade union does not stand for equal earnings for all work- 
men. It does not object toi one man's earning twice as much as the 



5i6 READINGS IN ECONOMIC PROBLEMS 

man working by his side, provided both men have equal rates of 
pay, equal hours of work, equal opportunities of securing work, 
and equal conditions of employment. What the union insists upon is 
that certain minimum requirements be fulfilled for the health, coni- 
fort, and safety of all, in order that the workingmen shall not be 
obliged to compete for jobs by- surrendering their claims to a reas- 
onable amount of protection for their health, and for their life and 
limb. 

The trade union thus stands for freedom of contract on the part 
of workingmen — ^the freedom or. right tO' contract collectively. The 
trade union also' stands for definiteness of the labor contract. The 
workingman agrees to work at a wage offered him, by his employer, 
but frequently nothing is said as to hours of labor, periods for 
meals and rest, intensity of work, conditions of the workshop, pro- 
tection of the workmen against filthy surroundings or unguarded 
machinery, character of his fellow- workmen, liability of the em- 
ployer for accident, nor any of the thousand conditions which 
affect the' welfare of the workman and the gain of both employer 
and employee. In the absence of an agreement with the union it 
is in the power of the employer tO' make such rules absolutely, or 
to change or amend them at such times as he thinks proper. 

The right to bargain collectively necessarily involves the right 
to representation. Experience and reason both show that a man, 
who is dependent upon the good will of an employer, -is in no po- 
sition to negotiate with him. Workingmen should have the right 
to be represented by whomsoever they wish. The denial of the 
right of representation is tyranny. Without the right to choose 
their representatives, the men cannot enjoy the full benefit of col- 
lective bargaining; and without the right of collective bargaining, 
the door is open to the evils of the individual contract. To avoid 
these calamities the workmen demand "the recognition of the 



J. TRADE UNIONISM AND WAGES. 
282. Trade Agreements. 

BY JOHN K. COMMONS. 

Philanthropists have long been dreaming of the time when cap- 
ital and labor should lay aside the strike and boycott and should re- 
sort to arbitration. By arbitration they understand the submission 
of differences to a disinterested third party. But the philanthropists 
have overlooked a point. Arbitration is never accepted until each 



LABOR PROBLEMS ^ij 

party to a dispute is equally afraid of the other; and when they 
have reached that point, they can adopt something better than arbi- 
tration, — namely, negotiation. Arbitration is impossible without or- 
ganization, and two equally powerful organizations can negotiate as 
well as arbitrate. This higher form of industrial peace — negoti- 
ation — has now reached a formal stage in a half dozen large in- 
dustries in the United States, which, owing to its remarkable like- 
ness to parliamentary government in the country of its origin, Eng- 
land, may well be called constitutional gO'vernment in industry. 

The bitumiino'us mine operators and the bituminous mine work- 
ers of the four great states of Illinois, Indiana, Ohio and Penn- 
sylvania have such a constitution. The annual interstate conference 
of the bituminous coal industry is the most picturesque and inspir- 
ing event in the modern world of business. Here is an industry 
where, for miany years, industrial war was chronic, bloodshed fre- 
quent, distrust, hatred, and poverty universal. Today the leaders 
of the two sides come together for a twO' weeks' parliament, face 
to face, with plain speaking, without politics, religion, or demagogy ; 
and there they legislate for an industry that sends upon the market 
annually $200,000,000 of product. 

The most comforting feature of such negotiations is the matter- 
of-fact way in which each side takes the other. There is none of 
that old-time hypocrisy on the part of the employers, that their 
great interest in life is to shower blessings upon their hands ; and 
there is none of that ranting demagogy on the part of the work- 
men about the dignity of labor and the iniquity of capital. On the 
contrary, each side frankly admits that its ruling motive is self- 
interest ; that it is trying to get as much as it can and to give as 
little as it must ; and that the only sanction which compels them to 
comie together, and tO' stay together until they reach a unanimous- 
vote, is the positive knowledge that otherwise the mines will shut 
down and neither the miner will earn wages nor the operator reap 
profits. It is simply wholesome fear that backs their discussions ; 
the capitalist knows that there are no other laborers in the world 
whom he can import as "scabs" to take the places of those whose 
representatives face him in this conference and this scale com- 
mittee, and he knows, too, from a severe experience, that every one 
of these 110,000 miners will obey as one man the voice of these 
their chosen representatives. The miners know, also, that these 
capitalists with whom they are negotiating are the very ones who 
control their only opportunities for earning the wages that feed 
themselves and their families. Consequently, everybody knows that 
an agreement must be reached before adjournment, or else the in- 



5i8 READINGS IN ECONOMIC PROBLEMS 

dustry will be reduced toi anarchy and their wages and profits, to 
sav nothing of lives, will be destroyed. 

In every trade agreement there are usually two large and dis- 
tinct questions on which the parties differ, namely, wages and meth- 
ods of managing employees. The labor side wants higher wages 
(including short hours) and restrictions on bosses and foremen. 
The employer side wants low wages and a free hand for the boss. 
Each side thereupon comes to the joint conference with demands 
more extreme than it expects to- see granted. At the conference of 
1900 the operators offered an advance of 9 cents per ton and the 
miners demanded an advance of 20 cents. The operators wished to 
retain the system of paying for the screened coal only, and not for 
the slack and waste ; but the miners demanded payment on the basis 
of the "run-Oif-the-mine," i. e, of all coal brought to the surface, 
before it is run over the screens. The miners asked also' 7 cents 
differential between pick and machine mining, but the operators 
wanted 12 cents differential. 

These opposing propositions had been formulated in separate 
conventions and conferences by the opposing sides. The operators' 
position was presented tO' the joint conference and received the 
unanimous "aye" of the operators and the unanimous "no" of the 
miners. The miners' proposition was then presented, and received 
the unanimous "aye" of the miners and the unanimous "no" of the 
operators. The two sides then began their parrying. Mr. Mitchell 
accused the operators of "joking." The operators accused the miners 
of absurdity. Several days were spent in these tilts. Finally con- 
cessions were made on both sides. Certain matters were left un- 
decided or referred back to the state conferences. The committee 
reported a unanimous agreemient, and the joint conference adopted 
it unanimously. It gave an advance of 14 cents in some districts, 
and 9 cents in others. It permitted the "mine-run" standard in cer- 
tain districts, and the "screened" standard in other districts, and a 
"double standard" in yet a third group of districts, but regulated 
the size of the screen and fixed a wide differential between "mine- 
run" and a "regulation screen." Similar compromises were made on 
the machine scale, day labor, and all along the line. Nobody was 
satisfied, yet everybody was satisfied. It was the best they could do. 
and it saved the business from paralysis. "x\ failure to agree," 
said President Mitchell in his closing speech, "would not only have 
ruined the homes of the miners, but would have ruined the business 
of the operators." And though the miners did not get what they 
expected, yet, said Mitchell, "there has never been a time in the 
history of mining, even within the recollection of the oldest one 



LABOR PROBLEMS 



519 



among you, when an advance so great as this, and applied to so 
great a number of men, was secured." 

The success of each conference depends directly upon the en- 
forcement of the legislation of the preceding conference. Curiously 
enough, this enforcement falls solely upon the miners' organization. 
The operators, indeed, have their several state associations, but no 
national nor interstate association like that of the miners. More- 
over, the operators are loosely organized. They can bring only 
moral suasion to bear upon the recalcitrant operator who rebels 
at their national decrees. But the miners can do more; they not 
only can suspend their own local unions which violate the agree- 
ment, but they can shut down the mine of the rebellious operator 
and drive him out O'f business. The operators understand this, and 
they know that their own protection against the cutthroat operator 
depends solely on the Miners' Union. President Mitchell, O'f the 
union, at the close of the Indianapolis conference, significantlv ac- 
cepted his office of joint executive in what might be called his in- 
augural. He said, "I will give notice to the operators now that 
when the}' go home; unless they, keep the agreement inviolate, we 
will call the men out ; and I will serve notice on the miners that, 
unless they keep the laws of the organization, we will suspend them 
from the organization." 

In trade agreements the employer must recognize the union. 
Employers are willing to pay high wages if all their competitors 
pay the same wages. It is not high wages that they dread, but secret 
and unfair cutting of wages. This is alsO' exactly what the laborers 
resist. The joint state or national agreements place all competitors 
on the same basis in the same market. Indeed, in the coal trade 
the scale is nicely adjusted so that the districts with the better 
quality of coal and the lower railway charges are required to* pay 
enough higher wages than other districts to counterbalance their 
superior natural advantages. On this basis, so- far as the union 
enforces the agreement, every operator knows exactly what his 
competitor's coal is costing; there is no secret cutting; and the 
trade is not brought down to the level of the few unscrupulous and 
oppressive operators who grind down their laborers. For this reason 
the bulk of employers who have had experience with these joint 
agreements are heartily in favor of them. 

The most important result of these trade agreements is the 
new feeling of equality and mutual respect which springs up in 
both employer and employee. After all has been said in press and 
pulpit about the "dignity of labor," the only "dignity" that really 



520 READINGS IN ECONOMIC PROBLEMS 

commiands respect is the bald necessity of dealing with labor on 
equal terms. With scarcely an exception the capitalist officials who 
make these agreements with the labor officials of these powerful 
unions testify to their shrewdness, their firmness, their temperance, 
their integrity, and their faithfulness tO' contracts. Magnificent gen- 
eralship is shown in combining under one leadership the miscel- 
laneous races, religions, and politics that compose the miners of 
America. The laibor movement of no other country has faced such 
a problem. 

283. Unionism versus Scientific Management. 

BY JOHN R. COMMONS. . 

Are the principles of trade unionism and scientific management 
in irrepressible conflict? Can one survive only by crushing the 
other? Or is their opposition an accident due to imperfections 
which may be corrected, so that both can flourish together? It is 
sometimes argued that unions would be of greater advantage to 
workingmen, if they would make the production of wealth their 
main object. But I consider this the business of the employer. 
The union has survived only to the extent that it has chosen to 
enforce policies that restrict the employer. Conscious of the fu- 
tility of trying to cope with the employer on his own ground, 
modern trade unionism contents itself with trying to tie his hands. 
Its policies are necessarily restrictive. Nearly all of the restrictive 
policies of which complaint is made spring from the effort to pre- 
serve the union. The irrepressible conflict, therefore, if there is 
one, between unionism and scientific management, will be found 
at the points where management weakens the solidarity of union- 
ism. The real question here is this : Can scientific management 
deal scientifically with organization as well as individuals? Is 
there a science O'f industrial organization as well as a science oi 
engineering details? 

The history of the stove moulders will assist us. Long before 
managenaent became a science, the stove foundrymen has practiced 
its principles. For forty years, prior toi 1890, they were working 
on the problem of efficiency details. They learned to^ sub-divide 
labor so that a three dollar man Avould always be kept on three- 
dollar work. They played on the motives of individual workmen 
to stimulate output, regardless of the effect on other workmen and 
other employers. The consequence was that for forty years every 
step towards greater efficiency and greater output per man brought 
a cut in the price of stoves ; and every cut in the price of stoves 



LABOR PROBLEMS 521 

took away so much of the emplo)'ers' reward for efficiency ; every 
loss of profits forced the employers to cut the piece rates of wages ; 
every cut in piece rates forced the wage-earners to greater output 
for the same earnings ; and so on, around the vicious circle of futile 
efficiency. 

Now that circle is very familiar to wage-earners in every busi- 
ness. It is SO' familiar that they take it as a matter of course. 
The thing that is equally plain is the infinite capacity of bonds and 
stocks to- absorb every gain from the efficiency of labor. The sugar 
trust, the steel trust, and other trusts that might be mentioned, are 
not .hopeful inducements to wage-earners to take an interest in 
scientific increase of output. Fear and greed may coerce exertion, 
but somewhere along the road' ahead of them, they see the bonus 
foreman, the profit-sharing superintendent, and the absentee stock- 
holder ready to relieve them of their increased product. 

As regards the stove moulders, they tried co-operation often, in 
the vain endeavor to avoid strikes. Finally, to- prevent employers 
from cutting piece rates and to build up a compact union, they es- 
tablished the rules that apprentices should be limited ; that no man 
should be allowed to work with the aid of helpers ; and that no man 
should be permitted to earn more than a fixed wage set by the 
union. And then, to enforce the rules, they fined and expelled the 
violators and established and violently enforced the other rule that 
union men should not be allowed to work with non-union men. 
Finally this anarchy of individual efficiency brought its correction in 
the form of a representative government in charge of the industry. 
This is the trade-agreement, or joint conference systemi, that has 
preserved industrial peace in the stove foundry business for over 
twenty years. It governs the employer as firml}^ as the employee. 
The employer who cuts a piece rate is expelled from the employers' 
association and is left alone to- defend himself against the union. 
It required some fifteen years of the agreement system to- bring 
about this final result, so inveterate and abiding had been the dis- 
trust by the union of the employer's power and will to restrain hini'- 
self from seizing upon the efficiency earnings. Through these rules 
run the two conflictimg principles — efficiency and restriction — iboth 
of them brought into a kind of equilib-rium by the higher principle 
of organization. 

I do not mean tO' say that this agreement system is the only 
form of organization that scientific study can Avork out for modern 
industry. Nor do- I mean to- say that efficiency engineers are not 
taking into account the problems of organization as well as indi- 
vidual output. What I do mean to say is this: the employer's busi- 



522 



READINGS IN ECONOMIC PROBLEMS 



ness as business now goes on, is to attend to the increase of effici- 
ency ; the wage earner's business is to sell himself to do the em- 
ployer's bidding for a period of time. The two interests are neces- 
sarily conflicting. Open conflict can be avoided in three ways ; 
by the doiiiination oi the employer, as in the steel trust today ; by 
the domination of the union, as in the iron industry prior to^ the 
Homestead strike; by the equal dominion of both interests, as in 
the stove-foundry business today. The first and second methods 
do not solve the problem; they suppress it. The third meets it in 
a constitutional form of organization, representing the interests 
affected, with mutual veto, and therefore with progressive com- 
promises as conflicts arise. 

It is an uninformed opinion that persists in holding that the 
opposition of organized labor to- industrial efficiency is merely ob- 
structive and unreasoning. Organized labor is merely the organ- 
ized expression of what la'bor in general would express were it 
organized. To' meet this avowed hostility of organized labor is 
to meet the instinctive hostility of nearly all labor, based on ex- 
perience. It is not enough tO' adopt clever devices of compensation 
designed to separate laborers into individual bargaining units, for 
it is exactly this separation that competitive conditions are forcing 
laborers, as well as capitalists, to overcome. 

284. The Economics of the Closed-Shop. 

BY FRANK T. STOCKTON. 

In recent popular discussion of the closed shop nnuch emphasis 
has been put upon its uneconomical character. The charge is made 
that the demand for the exclusive employment of union men, by 
interfering Avith the right of an employer, to "run his own business," 
makes high efficiency impossible. This argument is based on the 
fact that the employer, under the competitive system, is alone re- 
sponsible for the successful conduct of business undertakings. If 
he fails to produce as well and as cheaply as others do, the loss is 
his. It is necessary, therefore, for the most economic conduct of 
business that the employer "should have power to^ order his own 
affairs." He "should not be influenced by any other consideration 
in the hiring of men than the ability, fitness or loyalty of the appli- 
cant." At the same time he should be free to reward exceptional 
workmen and to discharge those who are inefficient or insubordi- 
nate. He should be the sole judge as to the kind of machinery, 
tools, and material to be used. Only in this way, it is argued, can 



LABOR PROBLEMS 



523 



the employer secure that "effective discipline" which is essential in 
bringing about the "highest measure of success in industry." 

The "essence" of the open shop is that the employer is entirely 
free "to hire and discharge." The closed shop, on the other hand, 
denies him the "right to hire and discharge." If the employer 
wishes to hire competent non-union men, he is prevented from pro- 
curing their services if they cannot or will not obtain union mem- 
bership. 

The employer complains that under the closed shop, instead of 
being able to secure wo^rkmen regardless of whether they are union 
or non-union, white or black. Catholic or Protestant, Jew or Gen- 
tile, he is compelled to draw from a definitely fixed labor market. 
Very often, too, this market is severely limited by the refusal of 
the unions on one ground or another to admit competent workmen 
to membership. He cannot hire members of other unions who^ are 
competent to do the work because this will at once involve him in 
a jurisdictional dispute. One trial is enough to demonstrate the 
fact that members of rival unions tolerate each others' presence less 
than they do that of non-unionists. There is then no' practicable 
way in which he can secure additional help when his work increases 
except by bidding for workmen against other union employers. It 
is also said that the closed shop serves to prevent the discharge of 
inefficient employees. 

Another evil attributed to the closed shop is that it establishes a 
minimum wage which becomes virtually also a maximum wage. 
This is said to produce a disastrous "dead level" of efficiency 
throughout an estaJblishment and to discourage effort. Accordingly 
union control is declared tO' be "absolute death to individual effort 
and ambition," and to cause the degeneration of "mental and moral 
fiber." Restriction of output is the direct result of such conditions. 
Especially harmful does the closed shop become, in the opinion of 
its opponents, when a union rec[uires foremen to obey its rules and 
to serve the union rather than the employers. All closed-shop 
tmions, it is represented, "define the workman's rights but say 
nothing of his duties. They destroy shop discipline and put nothing 
in its place." 

To these indictments the advocates of the closed shop have made 
vigorous rejoinder. They assert that while the unions do not allow 
employers to "victimize" their members, they do not interfere other- 
wise with the "right to hire and discharge" as long as all persons 
who are hired become union members. It is also flatly denied that 
the minimrim wage is usually the maximum, and that production 
is restricted in closed shops. 



524 READINGS IN ECONOMIC PROBLEMS 

The reconciliation of these conflicting .statements of facts is 
possible. The opponents of the closed shop in discussing its economic 
efi'ects always assume that the closed shop is everywhere the same, 
and take as typical those unions in which the restrictions on employ- 
ment are most severe. The advocates of the closed shop assume as 
typical those unions in which the restrictions are mildest. It will 
be noted that in this respect the unions vary widely. In the majority 
of closed-shop unions, however, the employer is allowed to hire non- 
unionists when competent unionists are not available, or even in 
many unions when they are available. It is also customary to allow 
such non-unionists to work a certain period in a shop before being 
required to join the union. Tliere is little basis for the claim, there- 
fore, that employers are restricted to hiring union men only. It is 
true that "scabs" and members of rival unions are rarely allowed to ' 
work. "Scabs," however, form but a small part of the men in any 
trade, and agreements between rival unions have now to some extent 
solved the problem of jurisdictional disputes. 

If the union itself is closed, union employers have no means of 
obtaining additional help when their business increases. The closed 
union, however, altliough it is usually found with the closed shop, is 
not identical with it. To say that no more members shall be admitted 
to a union is an entirely different thing from saying that union men 
shall not work with non-unionists. 

All unions that have advanced beyond the most rudimentary 
stage enforce a minimum wage. The tendency to uniformity and a 
"dead level" growing out of the existence of the minimum wage can 
only be connected with the closed shop through some restriction on 
the right to hire and discharge. If the union has a compulsory wait- 
ing list, it is easy to see how the minimum wage may become the 
maximum wage. However, compulsory waiting lists are established 
in very few unions. Similarly, restriction of output is connected 
with the closed shop only through the waiting list. A great part of 
closed-shop unions do not have waiting lists. 

It is also charged that the joint and extended closed shops lead 
to demands upon employers. When satisfactory conditions have 
been obtained in one trade, the men may be called out on strike be- 
cause "unfair" material is used, or because the open shop exists in 
an allied trade. Grievances "manufactured outside the shop" are 
thus said to be constantly arising. Complaint is also made that the 
closed shop is responsible for many unnecessary shop rules which 
virtually deprive the employer of control over his business. One 
writer has gone so far as to say that "the amount of restriction which 
it may be expected to find in 'closed shops' will certainly amount to 



LABOR PROBLEMS 



525 



one-third of what the output should amount to." Statements have 
frequently been made that the open shop has brought business pros- 
perity to different communities. 

Taking up the last of these contentions first, the unions allege 
that closed-shop agreements are of distinct advantage to employers. 
In open shops of most trades the employer is said to be constantly 
harassed with complaints from individuals. In closed shops all 
grievances must first be referred to the union, which acts upon many 
of them unfavorably. It is equally undeniable that most unions 
which have opportunity to enforce the extended or the joint closed 
shop have not hesitated at times to strike even when all their de- 
mands in the particular shop have been satisfied. 

The unions have also denied in a general way that their shop 
rules have been unduly restrictive. As a matter of fact, the great 
open-shop movement which began in 1901 was caused primarily by 
the rapid increase in rules regulating the number of apprentices, the 
kind of machinery that should be used, the methods of shop manage- 
ment, and the Hke. The connection between the closed shop and 
arbitrary shop rules is close, but the two are not identical. Arbitrary 
rules can rarely be enforced except in closed shops. If the union 
is strong enough to secure the one, it can, if it sees fit, enforce the 
other. Obviously, however, a closed-shop union need not, and 
many of them do not, have hurtful shop rules. 

The defenders of the closed shop have tried to show that the 
closed shop is an advantage to an employer. In the first place, they 
claim that the closed shop protects fair-minded employers from 
"cut-throat competition." If an industry is thoroughly unionized, 
every manufacturer or contractor can tell precisely what his com- 
petitors are paying in wages. As wages form the largest item in the 
average employer's expense account, it therefore becomes possible 
for him to "figure intelligently on his work," something which he 
"could never feel certain of were the open shop to pervail." The 
same shop rules also apply in all union establishments. Under the 
open shop not nearly the same uniformity in competitive conditions 
can be secured. The closed shop is a device absolutely essential to 
the rigid and wide enforcement of union rules. 

Secondly, those who uphold the closed shop afiirm that it tends 
to create a greater esprit de corps among the men than the open 
shop. does. Union and non-union men represent two diametrically 
opposed ideas. The first stand for collective, the second for indi- 
vidual action. Consequently, there is constant conflict between the 
two in the endeavor to obtain control over a shop. Because his men 
do not co-operate, the employer is likely to lose money. Therefore 



526 READINGS IN ECONOMIC PROBLEMS 

as a business necessity open shops must become either union or non- 
union. That there should be ill-feeHng between union and non- 
union men is easily understood when we consider why unions desire 
the closed shop. Non-union men are the economic enemies of 
unionists as long as employers resort to individual bargaining or 
express a dislike for full union control. In particular, efforts are 
put forth to make the employment of "scabs" unprofitable. 

Finally, unionists say that the closed shop is advantageous to 
employers because in many unions it carries with it the privilege of 
using a label that has a distinct market value. No union solicits 
work for an open shop. A label, however, is an advantage to an 
employer only under certain conditions. It can be used to best 
advantage on articles largely purchased by the laboring classes. That 
a label increases sales on such goods is evidenced by the fact that 
manufacturers, solely for the purpose of obtaining the use of the 
label, have often asked that their establishments be unionized. The 
labor journals not infrequently contain statements from employers 
that the closed shop is a "good business proposition." But the label 
rarety effects an increase in the demand for expensive goods or for 
articles sold to women. It is evident, therefore, that the number of 
employers who can find an advantage in the use of the labels is small 
relative to the total number of employers. 

To sum up the arguments against the closed shop on the ground 
that it affects unfavorably the economic conduct of industry, it may 
be said that the crux of the question is whether or not the "right to 
hire and discharge" is unduly restricted under the closed shop. The 
employer may enjoy the use of a valuable label and may be placed 
on a "fair competitive basis" with other employers. Individually the 
employer may reap a gain. But in the long run industry will be 
carried on less efficiently if by waiting lists or other restrictive 
devices the union interferes with the employer's hiring and discharg- 
ing his working force in accordance with his best judgment. 

285. The Legal Attitude to Trade Unions. 

Something of the attitude of the courts towards organizations of 
labor can be obtained from the following excerpts from a judicial 
opinion. In the case in question an application had been made to a 
court of equity by a labor union to issue an injunction restraining 
the walking delegates of another union from calling out the mem- 
bers of their union on a strike. The injunction was denied; but 
there is conflict on this point, and the weight of authority is prob- 
ably with the dissenting opinion, part of which is given below. 



LABOR PROBLEMS 527 

Workingmen have the right to organize for the purpose of secur- 
ing higher wages, shorter hours of labor, or improving the relations 
with the employers. They have the right to strike, that is, to cease 
working in a body by pre-arrangement until the grievance is 
redressed, provided the object is not to gratify malice or inflict 
injury upon others, but to secure better terms of employment for 
themselves. A peaceable and orderly strike, not to harm others, 
but to improve their own conditions is not a violation of the law. 
They have the right to further and to persuade and solicit others, 
who do not belong to their organization and are employed for no 
fixed period, to quit work also, unless the common employer of all. 
assents to lawful conditions designed to improve their material wel- 
fare. They have no right, however, through the exercise of coercion 
to prevent others from working. They have no right by force, 
threats, or intimidation, to prevent members of another labor organi- 
zation from working, or a contractor from hiring them or continuing 
them in employment. 

Every man has the right to carry on his business in any lawful 
manner he sees fit. He may employ such men as he pleases and is 
not obliged to employ those whom, for any reason, he does not wish 
to have work for him. He has the right to the utmost freedom of 
contract and choice in this regard, and interference with that free- 
dom is against public policy because it tends not only to destroy 
competition, but in a broad sense to deprive a man of both liberty 
and property. Threatening, molesting, intimidating and obstructing 
others in their trade or calHng is contrary to law, because it is in 
violation of personal rights, in restraint of trade, and injurious to 
society. 

K. THE STRATEGY AND WEAPONS OF INDUSTRIAL 

CONFLICT. 

286. Definitions of the Weapons. 

BY FRANK T. CARLTON. 

A ''strike," according to the definition given by the United States 
Bureau of Labor, "is a concerted withdrawal from work by a part 
or all of the employees of an establishment, or several establish- 
ments, to enforce a demand on the part of the employees." A 
strike occurs when wage earners unitedly cease work but attempt to 
retain their places as employees. The purpose of the strike is usually 
to obtain some improvement in working conditions or to prevent 
some change that it considered disadvantageous to the workmen. 



528 READINGS IN ECONOMIC PROBLEMS 

When the emplo3'er closes his shop because of a disagreement 
with his employees a lockout occurs. The difference between a 
strike and a lockout lies chiefly in the initiation of the action which 
stops the wheels of industry. 

The boycott may be divided into three classes : the simple boy- 
cott, the compound boycott, and the unfair list. In the simple boy- 
cott only the persons directly interested are involved. The members 
of the union may refuse to buy an article produced by a firm declared 
to be unfair to union labor. The compound or the secondary boy- 
cott involves third parties who are not directly interested in the 
• dispute. The term boycott usually refers to the compound boycott. 
If the members of the union refuse to patronize a merchant who 
handles along with other merchandise the product of the boycotted 
manufacturer, the boycott is said to be compound. Again if the 
members of the union persuade or coerce others into refusing to 
buy the product of the boycotted manufacturer or of the merchant 
who sells the former's goods, the boycott is compound. The Court 
of Appeals of the District of Columbia defined the boycott as "a 
combination to harm one person by coercing others to harm him." 

An association of employers may prepare and circulate a list of 
employees who have gone on a strike or who have been discharged 
because of activity in labor organizations. Men whose names appear 
on such a list will not be employed by members of the association. 
This practice is known as blacklisting. The blacklist is the em- 
ployer's boycott of the laborer's commodity, — labor. 

287. The Function of the Strike in Collective Bargaining. 

BY JOHN MITCHElvIv. 

The normal condition of industry is peace. The average work- 
ingman, engaged in industries in which strikes occur, loses less than 
a day a year in this manner. A strike lasts upon the average about 
twenty-three days, but the average employer carries on his business 
for thirty years without a strike. The average lockout lasts ninety- 
seven days, but of a thousand establishments, less than two declare 
a lockout in the course of a year. 

A strike is simply a method of bargaining. If the grocers of a 
city would refuse to sell their sugar for less than seven cents a 
pound and the customers would refuse to pay more than six, exactly 
the same thing would occur as happens in an ordinary strike. A 
strike does not necessarily involve any form of bitterness ; it merely 
represents a difference between what the buyer of labor is willing 
to offer, and what the seller of labor is willing to accept. Until the 



LABOR PROBLEMS 



529 



"buyer and seller of an ordinary commodity agree as to price and 
conditions no sale can be effected. Until the wages and conditions 
of work are agreed upon and acceded to by both employer and 
workman, the industry must stop. 

Strikes thus result from a failure to make a bargain or contract 
by men who are free to contract. Strikes cannot exist before free- 
dom of contract is accorded. The present conception of a strike is 
that of workmen and employers exercising their undoubted right to 
refuse to enter into contracts where the conditions are not satis- 
factory to them. 

It is frequently stated that trade unions desire strikes because 
they are organized for that purpose. This is not true. The trade 
union is organized for the purpose of securing better conditions of 
life and labor for its members, and, when necessary, a strike is re- 
sorted to as a means to that end. The same conditions which cause 
the creation of trade unions are equally answerable for the constant 
demand for improved conditions for the working class, which 
demand frequently voices itself in strikes. 

Strikes are to be avoided in all cases where the object desired can 
be obtained by peaceful negotiation. There is nothing immoral, 
however, in the workingman's striking, just as there is nothing im- 
moral in his wanting higher wages. 

288. The Utility of the Strike. 

BY FRANK JULIAN WARNE. 

A Strike is simply a piece of industrial machinery, if it may be so 
termed, which the organization of the Trade Union provides for 
the attainment of well-defined and laudable objects. Its operation 
does not necessarily mean the violation of law, or the destruction 
of property, or the taking of human life. All these, where in evi- 
dence, are unforseen incidents to the conduct of a great strike for 
any long period, and are the manifestations of aroused human 
passion and class hatred. No one would question the use of a 
revolver in the hands of a husband defending his wife and children 
and home from the violation of its sanctity by outlaws, but most of 
us would condemn the employment of the same weapon in the hands 
of the outlaws for the accomplishment of their designs. And yet 
the weapon in both cases is a revolver. So it is with the Strike ; it 
is simply a weapon for the attaining of certain well-defined ends. 
In the hands of men defending their Standard of Living from the 
cupidity and inhumanity of particular members of the employing 
class, the Strike is of the very greatest social value. But like the 



530 



READINGS IN ECONOMIC PROBLEMS 



revolver, it can be misused, as in the case of self-seeking individuals 
masquerading under trade-union principles, but because of that 
misuse the weapon should not be condemned. It is no more possible 
for the Trade Union to prevent the Strike from falling into the 
hands of those who misuse it, than it is for the Law to prevent 
revolvers from coming into the possession of outlaws. The Strike 
has performed and will continue to perform a most useful function 
in the progress of the trade-union movement, and consequently in 
the onward march of American civilization. 

It is true that the course of the labor movement has been marked 
by the taking of human life and the destruction of property, just as 
has been the case in the creation of the State and the establishment 
of the Church. The why and the wherefore are easily to be ex- 
plained in the theory of the adjustment of the principles of new 
institutions to those created for society by older established ones. 
This is not said as an apology for the taking of human life in strikes. 
No one regrets this manifestation of the progress of the Trade 
Union more than does the writer, and yet if he had to choose be- 
tween preserving the lives that have been so lost and retaining the 
Trade Union as an institution, it would not be in favor of the 
former. This decision would be made in the firm belief that in the 
attainment of its objects — in throwing more safeguards around the 
workingman, especially in hazardous employments ; in securing 
better sanitary arrangements in factories and mills, in preventing 
the employment of children at tender ages, in securing higher wages, 
.in reducing the hours of employment, in raising the Standard of 
Living, and in innumerable other ways — in these directions the 
Trade Union is saving for society more Hves than have been taken 
in all the industrial conflicts of which history gives any record. 

The Strike jutifies itself either as a weapon of offense or defense 
in the protection, as a last recourse, of the Standard of Living of the 
American workingman. It is, economically, simply the refusal of a 
number of workingmen, usually organized in an association, to sell 
their labor for less than a stipulated price or to work under other 
than specified conditions of employment, coupled with the refusal 
of the purchaser of that labor — the employer — to accede to the 
demands. 

289. How a Strike is Called. 

BY THi; INDUvSTRIAIv COMMISSION. 

The whole tendency of the union rules, as they develop with the 
increasing strength of the organizations, is to put a check upon rash 
and hasty strikes. Even where national organizations do not exist. 



LABOR PROBLEMS 



531 



the local constitutions usually require proper deliberation, and a 
vote of a majority, often a two-thirds or three-fourths majority, 
before a strike may begin. The more highly organized national 
bodies have rules of the following general character : Before any 
action is taken looking toward a strike, the officers of the local 
union, or a committee chosen for the purpose, must approach the 
employers and try to reach a settlement of the existing difference 
by negotiation. Some unions direct that an effort be made for 
arbitration, if necessary, with the aid of an umpire. If these prim- 
ar}^ negotiations are unsuccessful, the local union votes on the ques- 
tion of sustaining the claim of its members, and resorting, if neces- 
sary, to a strike. A very large proportion of the national unions 
which have any elaborate rules at all upon the subject provide that a 
strike shall not be ordered except by a vote of two-thirds or three- 
fourths of the members present at the meeting. It is often required 
that every member be notified of the meeting, and in many unions it 
is specially provided that the vote be taken by secret ballot. The 
purpose of this is to leave every member free to vote against a strike 
if his judgment is against it. If the vote were open men might be 
ashamed to seem to shrink from standing by their comrades. In 
some unions no one can vote on the question of declaring a strike 
until he has been a member of the union three, or four, or six months. 

If the local votes for striking, its action must be reported to the 
national headquarters. It is often required that the report not only 
state in full the reasons for the action of the local, but also give in 
detail the number of members, the number who would be affected by 
the proposed strike, the number of non-union men in the place, the 
state of the finances of the local, and other detailed information. On 
receipt of this report it is in many unions the duty of the national 
president to go to the place where the trouble exists, or send a per- 
sonal representative there, and join with the local officers in renew- 
ing negotiations with the employers and trying once more to effect 
a peaceful settlement. Only after this renewed effort has failed is 
it permitted by the constitution of many unions that the national 
executive board approve by vote the action of the local. In some 
half dozen unions this power does not rest with the executive board, 
but with the members at large, and the local strike can be approved 
only by a referendum vote. 

The national executive board of the Stove Mounters has power 
to order any local on strike on pain of a fine of not less than $25. 
The Broom Makers lodge power to order a strike in the president. 
In the United Mine Workers the primary decision of strike ques- 
tions lies with the district officers, or, in case the trouble extends 



532 READINGS IN ECONOMIC PROBLEMS 

beyond the limits of a district, in the hands of the national president; 
subject, in either case, to an appeal to the executive board. The Tin 
Plate Workers and the Amalgamated Association of Iron, Steel, and 
Tin Workers lodge the power to order strikes in the executive com- 
mittees of the districts. One or two other unions give the national 
executive board power to order a strike by a four-fifths vote, under 
the exceptional conditions that more locals than one exist in a 
place, and that a majority of them refuse to sanction a strike on 
account of a grievance which directly affects one. With these excep- 
tions the rule is believed to be universal that no strike can be ordered 
except by a vote of the local unions concerned. In many organiza- 
tions not even a veto power resides in the central executive. 

290. Picketing. 

BY LINDLEY D. CLARK. 

Picketing as an incident to strikes is a watching or espionage of 
the place of employment, or the approaches thereto, or of the homes 
or lodging places of employees or possible employees, to procure 
information as to the progress of the strike and as to any means to 
make it effective. It has been defined as a watching and annoying. 
It is said that the definition has taken that form as the result of the 
conduct of the men engaged in the work of picketing, and that the 
adoption of a term derived from the nomenclature of war is appro- 
priate, as the picket is an expression of hostility and is evidence that 
a state of war exists. 

The courts differ as to the lawfulness of picketing. Where it is 
in aid of an unlawful strike, or is accompanied by violence, or ob- 
structs the highways or the approaches to places of business, there 
is no dift'erence of opinion. An insulting or menacing attitude may 
be no less intimidating than an actual assault. The fact that pickets 
are appointed by an organization in no wise relieves them from per- 
sonal responsibility for their conduct towards third persons. The 
fact that they are representatives of a "mysterious and powerful 
organized authority'' may be considered in determining whether or 
not the picketing is intimidating and coercive in its nature and effect. 
Picketing has been broadly condemned as illegal on the ground that 
the fact of its establishment is evidence of an intention to annoy, 
embarrass, and intimidate. Men may singly or jointly quit an em- 
ployer, but they have no right, either singly or jointly, to seek to ruin 
a man's business, by gathering about the approaches of his place of 
business, and there prevent his patrons from dealing with him. "In 
its mildest form it is a nuisance, and to compel a manufacturer to 



LABOR PROBLEMS 533 

have the natural flow of labor to his employment sifted by a self- 
constituted, antagonistic committee, is just as destructive of his 
property as is a boycott which prevents the sale of his product." 
The majority of cases seem to hold however that picketing is 
not in itself unlawful, and that the circumstances of each case must 
be considered. "There must be taken into account the size of the 
guard, the extent of their occupation of the street, and what they 
do and say. Taking every circumstance into account, if it appears 
that the purpose of the picketing is to interfere with those passing 
into or out of the works, by other than persuasive means, it is illegal. 
If the design of the picketing is to see who can be the subject of 
persuasive inducements, such picketing is legal. 

291, Ostracism as an Industrial Weapon. 

BY FRANK JULIAN WARNi;. 

In controlling the ordinary supply of labor in the industry, com- 
mittees of union men visit personally every man employed who has 
not already been captured by the organizers, and his position is 
definitely ascertained. This is one of the most important uses of 
picketing, by means of which men are met on their way to and from 
work. To the employees continuing at work the pickets at first have 
recourse to the powers of friendly and peaceable persuasion, but if 
these fail to induce the men to join the union, or, if not this, at 
least to remain away from work, then upon the non-union men are 
brought to bear social forces verging upon lawlessness, and over- 
stepping the safeguards the State has thrown around individual 
liberty, which only a strong public sympathy with the cause of the 
union will support. The most important of these social forces is 
ostracism. 

Ostracism is a stronger social force in maintaining a high stand- 
ard of personal conduct than most of us realize. It means banish- 
ment or exclusion from social intercourse or favor, and is usually 
employed by a particular group against m.embers of its own class or 
craft. Its most efifective weapon is some term of reproach coined for 
the purpose. Lawyers, for example, who do not come up to the 
standard set for that profession by its dominant group, are ostracised 
and termed "shysters." So it is with the medical profession: physi- 
cians engaged in questionable practices which the dominant group . 
denounce are ostracised by the more reputable practitioners with the 
reproachful term "quack." The same social force is at work among 
the industrial classes. Union men set a standard as to wages and 



534 READINGS IN ECONOMIC PROBLEMS 

conditions of employment in a particular industry, and those work- 
ingmen who fall below that measurement, in offering their labor for 
a less price, are ostracised and denounced as "scabs." Whether the 
group be doctors or lawyers or workingmen, whatever it adopts as 
the standard of measuring conduct along particular lines is sooner 
or later taken up by the broader social grouping in the community 
and accepted as its standard of judgment. This is particularly and 
strikingly true of a community closely identified with an industry the 
livelihood of whose members depends upon the industry's activities 
and in which a dominant group (usually members of a Trade Union) 
creates the industrial standard. This explains the attitude of hos- 
tility an industrial community exercises towards the "scab." It ex- 
plains, also, perhaps, how men far removed from the influence of 
the working classes can look upon the "scab" as a hero. 

The social force of ostracism, put into operation by the working 
of the Trade Union, is directed, and particularly so in strike times, 
not only against the "scab" himself, but also along all those channels 
of social relations aft'ecting him and which might have influence 
upon him in bringing about action conformable to the standard of 
the dominant group. The strength of this weapon in the strike of 
the anthracite-mine employees in 1902 caused union men and their 
families to refuse to associate with the workingman who continued 
his employment in the mines ; it expelled a prominent and other- 
wise highly respected citizen from a benevolent society which had 
for its object the assisting of sick members and the defraying of a 
part of the funeral expenses of those who died, and of which he had 
been a member in good standing for more than twenty-seven years ; 
it caused children of striking mine workers not only to refuse to 
attend the school of a woman teacher whose aged father was a 
watchman at one of the mines, but they also demanded that she be 
discharged. Children of union miners would not attend Sunday- 
school with their former playmates whose relatives continued at 
work ; members of the Lacemakers' Union employed at a silk-mill 
refused to work alongside girls whose fathers and brothers would 
not strike ; clerks were dismissed from stores and business estab- 
lishments because they were related to men who continued at work 
in the mines ; even promises of marriage were broken through rela- 
tives of one or the other of the contracting parties being non-union 
workers. The "scab" was not infrequently held up to public scorn 
and ridicule by the publication of his name in the "unfair list" of 
the newspapers in the mining towns as being "unfit to associate with 
honorable men ;" he was represented by name on signs attached to 



LABOR PROBLEMS 535 

effigies dangling from electric-light, telegraph, and telephone poles 
and wires and from trees in front of his home and along the high- 
ways and streets ; a grave in his yard with his name placed upon the 
board at the head to represent a tombstone not infrequently con- 
fronted him ; the sign of "the skull and cross-bones" was painted on 
his house, and in innumerable other ways, conceivable only by work- 
ingmen whose imaginative faculties have been aroused by the desire 
for persecution of others who oppose a cause which is so vital to 
their home and family, was created a public sentiment against the 
non-union employee. 

292. The Effectiveness of the Boycott and the Blacklist. 

BY AXBA M. EDWARDS. 

That in practice the conspiracy law is not equally restrictive 
upon employers and employees cannot be disputed. A boycott to be 
effective must be somewhat general. To make it so, agitation through 
the press or otherwise is necessary. It thus becomes more or less 
public, and a conspiracy of employees or unions to boycott their 
employers can be discovered and traced to instigators easily. 

It is otherwise with a conspiracy of employers to blacklist their 
employees. Its success does not require agitation or pubhcity, but 
the reverse. Knowledge of it can be confined to the conspirators. 
Overt acts are uncalled for. Such a conspiracy is not easily de- 
tected, and when detected it is almost impossible to secure evidence 
that will secure conviction. Again the employee, or his union, is 
less able to bear the expense of the suit than is the employer. The 
conviction of an employer is very difficult. Usually, to convict, a 
conspiracy must be shown to exist. The law makes no provision 
for the punishment of attempts to blacklist. 

293. The Boycott of the Butterick Company. 

BY A. J. PORTENAR. 

It was my fortune to take a very active part in the boycott insti- 
tuted against the products of the Butterick Company by Typographi- 
cal Union No. 6 in 1906, and later carried on by the International 
Typographical Union. This boycott was, I verily believe, better 
organized, more determined, and more damaging to the parties it 
was aimed at than any other I have knowledge of, not excepting that 
against the Buck Stove and Range Company, which is more widely 
known only because of the adventitious circumstances that brought 



536 READINGS IN ECONOMIC PROBLEMS 

the highest officials of the American Federation of Labor into 
court. Not only in the United States and Canada, but in Cuba, 
Germany, and Australia, the International Typographical Union cut 
into the sales and captured the customers of the Butterick Company. 
Wherever a typographical union was organized, there, in greater 
or less degree, the boycott was pushed. The expected court pro- 
ceedings were in evidence at all times. There were arrests, injunc- 
tions, actions for criminal contempt. In short I doubt if a more 
thorough trial of the efficiency of the boycott has ever been made. 

Now what about results? That the Butterick people were con- 
siderably damaged they themselves admitted. Eventually the But- 
terick house was unionized again, but it is not possible for us to say 
to what extent the boycott was responsible for that consummation. 
It is within my knowledge, however, that it had been decreasing in 
intensity for two years before an agreement with the company was 
reached, in 1911, and that at the time of settlement the boycott was 
practically dormant. 

I was very active in this matter, and from the experience thus 
gained T have reached definite conclusions. We expended a large 
amount of money ; how large I do not know. There was a con- 
tinuous distribution of printed matter and of comparatively expen- 
sive novelties bearing appropriate inscriptions. There were speakers 
sent to tour the country. There was an organizer whose sole duty 
it was to further th^ boycott. There was a prominent lawyer 
engaged by the year. So far as money could compass our object, 
we were not niggardly. But money is only one of the essential 
factors a union needs in the conduct of an afifair of this kind. Far 
more than money, it must have the enthusiastic devotion of its 
members to the continuous, laborious, and unpleasant work needful 
to make the expenditure of money effective. This, with a few 
exceptions, I found it impossible to get. And even these few, in the 
course of time, finding themselves unsupported by the great majority, 
began to get lukewarm, and at last ceased to labor in a field, so vast 
and so deserted. It was not that we had no success ; the Butterick 
Company is the best witness to the contrar3^ But it is scarcely 
believable how unremittingly we had to labor to save what we had 
done one day from becoming useless the next. And this fact eventu- 
ally led to the abandonment of the boycott and the slow recovery 
by the Butterick Company of the ground it had lost. Therefore my 
opinion is that no boycott can completely and permanently accom- 
plish the result sought, and very few will do nearly so much in that 
direction as the one here spoken of, which finally became a failure. 



LABOR PROBLEMS 537 

294. The Union Label. 

BY THE INDUSTRIAIv COMMISSION. 

The union label is a mark or device adopted by a labor organiza- 
tion and affixed to goods, or impressed upon them, to indicate that 
they are made entirely by members of the organization. So far as 
is known, the use of it is peculiar to the American unions. 

One of the weaknesses of the unions, in respect to label protec- 
tion, is that the trade-mark and copyright laws of the United States 
are so framed that they do not cover the label of a union, placed 
upon goods belonging to others. 

The aim of the union is, first, to furnish a means of distinguish- 
ing cigars, or hats, or shoes, which are made exclusively by union 
labor ; and. second, to induce as many customers as possible to refuse 
all others. The value of a union label depends of course, upon the 
number of purchasers who can be induced to insist on having labeled 
goods. To induce the customer to demand union-label goods two 
motives are presented : 

First, it is maintained, in many cases, that the goods that bear 
the label are made under more wholesome conditions, and are free 
from the danger of carrying infection. This argument is strongly 
insisted on in the case of cigars. The Garment Workers make 
similar claims. Their label is supposed to show that the garments on 
which it is placed have been made under fair conditions and not in 
sweat shops. It is only in a few trades, however, that such claims 
for the superiority of union-label goods in respect to wholesomeness 
are made. The kindred claim that they are made by skilled work- 
men, and that their quality is likely to be higher than that of goods 
without the label, is quite generally put forward. 

The second method of appeal to the customer, and that which 
is really important, depends on the customer's sympathy wdth the 
aspirations of the wage-earners for improved conditions, and par- 
ticularly with the policy of trade-union organization. This desire 
to help the unions is the motive which the label chiefly appeals to. 
Things of which workingmen are important buyers form the class 
of goods on which union labels can be used with greatest prospect 
of advantage. Cigars and tobacco, hats, shoes, and ready-made 
clothing are distributed largely among wage-earners, and if any 
distinguishing mark makes the goods more acceptable to them it 
unquestionably increases the value of the goods on which it is 
placed. Accordingly we find labels pushed most actively by the 
unions whose members are engaged upon such goods. 

Another class of goods on which it is possible, under some cir- 



538 READINGS IN ECONOMIC PROBLEMS 

cumstances, to use a label with advantage, consists of materials of 
building or manufacture, which, though bought by capitalists, are 
placed by them in the hands of workingmen for further elaboration^. 
If these workingmen are strongly organized, they may, by refusing 
to handle materials which do not bear the label, compel their employ- 
ers to patronize union-label firms, with much the same effect as if 
the workingmen themselves were the purchasers. 

295. A Legal Criticism of the Injunction. 

BY CHARI,^S CI.AP'I.IN AI^IvEN. 

Violation of injunction is punishable as contempt of court. 
Punishment for contempt of court is the most summary and arbi- 
trary exercise of authority under the English and American judica- 
ture. It is the reserve power inherent in every court of general 
jurisdiction to punish by fine or imprisonment, in order to maintain 
its dignity and enforce its commands ; a power which is absolutely 
essential to the proper conduct of courts of justice. 

The person charged with contempt is entitled to be heard, but he 
must appear in person and not by attorney. He has no right to be 
heard by counsel, nor to trial by jury. And the trial of facts for 
contempt not committed in facie curiae is usually on affidavits. While 
in contempt of an injunction, he can not move to dissolve, nor can 
he attack the jurisdiction of the court under the original bill, nor 
file any sort of dilatory pleading whatever, till he has purged him- 
self of the contempt. In short a party to a suit may go to jail for 
contempt of a preliminary injunction issued e.v parte, without notice 
to defendant, which is subsequently — and after the defendant has 
served his term of imprisonment — held to be without equity — -that 
is, void. This is a tremendous power to place in the hands of one 
man; for from his judgment there is no appeal. 

And what is the purpose of issuing injunctions against great 
masses of men? What object is to be attained by making 200, or 
even 500 strikers, parties to a suit, out of a total number of many 
thousands? Personal service on more than a few, in time to make 
the writ effective, is impracticable. Is it intended that the mere 
issuing of the writ should act in terrorein over the entire body of 
men engaged in the strike? Or is it expected, by posting copies in 
public places, to establish a novel method of service by publication? 
Is the decree to serve the purpose of a mere executive proclamation, 
warning evil-doers against a continuance of their misconduct, and 
without force or validity, except as a basis for invoking the military 
power? Surely not. Such a construction would be a degradation 



LABOR PROBLEMS 539 

of judicial process. Then the conclusion remains that the real pur- 
pose is to use the injunction for calling forth the power of the court 
to punish for contempt; to make of a court of equity in practical 
effect a criminal court. 

The practice of "blanket injunctions" covering large numbers of 
persons, not actual parties to the suit, and without personal service 
upon them, is indefensible. It is a general rule, as old as equity 
jurisprudence, that persons not parties to the bill are not bound by 
the decree. 

After all, what does it mean, this sudden development of equity 
jurisdiction? Whither are we tending? An injunction sued out by 
the United States against 10,000 strikers and all the world besides 
Does the injunction stop the strike? Troops are called out to aid 
the process. Do they aid it? Some scores of rioters are killed, but 
where was the injunction meanwhile? 



L. INDUSTRIAL UNIONISM. 
296. The Attitude of the New Unionism to Trade Unions. 

BY MARY K. O'SULUVAN. 

"We were drowning men ready to grasp at a straw when the 
Industrial Workers of the World appeared to save us," said more 
than one striker in Lawrence. Up to the present the Textile Work- 
ers of the American Federation of Labor have failed to organize the 
unskilled and underpaid workers. They have ignored their capacity 
for strength and failed to win them to their cause or to better their 
condition. In the past foreigners have been the element through 
which strikes in the textile industry have been lost. This is the 
first time in the history of our labor struggles that the foreigners 
have stood to a man to better their condition as underpaid workers. 

The textile workers had only one permanent organization at 
Lawrence at the beginning of the strike. John Golden, the official 
head of the Textile Workers of the World, instead of remaining in 
Lawrence and fighting for the interests of the workers, went to 
Boston and was reported to have denounced the strike as being led 
by a band of revolutionists. 

Members of the Industrial Workers of the World sent for Joe 
Ettor and in four days he organized a fighting force such as had 
never existed in New England before. 

Nothing was so conducive to organization by the Industrial 
Workers of the W^orld as the methods used by the three branches of 



540 READINGS IN ECONOMIC PROBLEMS 

the American Federation of Labor. These were the Lawrence 
Central Labor Union, the Boston Women's Trade Union League, 
and the Textile Workers of America. Catholics, Jews, Protestants, 
and unbeHevers — men and women of many races and languages, 
— were working together as human beings with a common cause. 
The American Federation of Labor alone refused to cooperate. As 
a consequence, the strikers came to look upon the federation as a 
force almost as dangerous to their success as the force of the em- 
ployers themselves, and I violate no confidence in saying that the 
operatives represented in the strike committee have more respect 
for the mill owners than for the leaders of this antagonistic element 
within their own ranks. A striker who went to the federation for 
relief was looked upon as recreant to his cause and before the strike 
ended the American Federation of Labor organizations, by openly 
refusing to give any one help who refused to return to work, came 
to be looked upon as a trap designed in the interests of the mills to 
catch any workers who could be induced to desert their cause. 

297. The Standpoint of Syndicalism. 

BY IvOUIS LEIVINE. 

The fact which is untiringly emphasized in the Syndicalist analy- 
sis is the objective antagonistic position of those engaged in modern 
industry. The owners of the means of production directly or indi- 
rectly running their business for their private ends are interested 
in ever-increasing profits and in higher returns. The workingmen, 
on the other hand, who passively carry on productive operations are 
anxious to obtain the highest possible price for their labor-power 
which is their only source of livelihood. Between these two economic 
categories friction is inevitable, because profits ever feed on wages, 
while wages incessantly encroach upon profits. 

From this twofold antagonism, rooted in the structure of modern 
economic society, struggle must ever spring anew, and this is the 
reason why all schemes and plans to avoid industrial conflicts fail 
so lamentably. Even the conservative trades unions, based on the 
idea that the interests of labor 'and capital are identical, are forced 
by circumstances to act contrary to their own profession of faith. 
Organizations like the Civic Federation are doomed to impotency. 
Boards of conciliation and arbitration work most unsatisfactorily 
and can show but few and insignificant results. 

All efiforts, therefore, to establish industrial peace under existing 
conditions result at best in the most miserable kind of social patch- 



LABOR PROBLEMS 541 

work which but reveals in more striking nudity the irreconcilable 
contradictions inherent in modern economic organization. 

There is but one logical conclusion from the point of view of 
Syndicalism. If industrial peace is made impossible by modern 
economic institutions, the latter must be done away with and indus- 
trial peace must be secured by a fundamental change in social organ- 
ization. At the root of the struggle between capital and labor is the 
private ownership of the means of production which results in the 
autocratic or oligarchic direction of industry and in inequality of 
distribution. The way to secure industrial peace is to remove the 
fundamental cause of industrial war, that is, to make the means of 
production common property, to put the management of industry on 
■ a truly democratic basis and. to equalize distribution. 

The Syndicalist distrusts the state and believes that political 
forms and institutions have outlived their usefulness and can not 
be adapted to new social relations. The Syndicalist program for 
the future, in so far as it is definite and clear, contains the outlines 
of an industrial society — the basis of which is the industrial union, 
and the subdivisions of which are federations of unions, and federa- 
tions of federations. The direction of industry, in this ideal system, 
is decentralized in such a manner that each industrial part of society 
has the control only of those economic functions for the intelligent 
performance of whicli it is especially fitted by experience, training, 
and industrial position. 

The creative force of the industrial struggle, according to the 
Syndicalist, manifests itself in a series of economic and moral 
phenomena which, taken together, must have far-reaching results. 
In the struggle for higher wages and better conditions of work the 
workingmen are led to see the important part they play in the 
mechanism of production and to resent more bitterly the opposition 
to their demands on the part of employers. With the intensification 
of the struggle, the feeling of resentment develops into a desire for 
emancipation from the conditions which make oppression possible; 
in other words, it grows into complete class consciousness which 
consists not merely in the recognition of the struggle of classes but 
also in the determination to abolish the class-character of society. 
At the same time the struggle necessarily leads the workingmen to 
effect a higher degree of solidarity among themselves, to develop 
their moral qualities, and to fortify and consolidate their organiza- 
tions. 

It is evident that unless the Syndicalist could theoretically con- 
nect the struggles of the present with his ideal of the future, the 
latter would remain a beautiful but idle dream even in theory. He 



542 



READINGS IN ECONOMIC PROBLEMS 



is bound, therefore, to find concrete social forces working for the 
realization of his ideal. His position forces him to prove that his 
ideal is the expression of the interests of a definite class, that it is 
gradually being accepted by that class under the pressure of circum- 
stances, and that the social destinies of the "revolutionary" class 
are more and more identified with the Syndicalist ideal. 

He cheerfully accepts the conclusion that if industrial strife is 
creating social harmony his task is to intensify the struggle, to 
widen its scope, and to perfect its methods — in order that the creative 
force of the struggle may manifest itself as thoroughly and on as 
large a scale as possible. He, therefore, logically assumes a hostile 
attitude towards all efforts tending to mitigate the industrial 
struggle, such as conciliation and arbitration, and definitely enters 
the economic arena for the purpose of stirring up strife and of 
accentuating the struggle as much as is in his power. 

298. The General Strike. 

BY ARTHUR D. ]:,e;WIS. 

A logical extension of the local strike leads to the "general strike," 
which, in its extremest form, is a strike of all the workers in the 
world, in order to expropriate all the owners of land and capital, 
and accomplish a world revolution. This is to be brought about by 
the spread of the strike-spirit. Obviously, if miners, transport- 
workers (that is, railway, dock, cartage, and tram employees), 
textile-workers, and building-trade workers (to select a few trades), 
all stopped work, it might be near enough to a total strike for all 
practical purposes, and the phrase "general strike" is not applied 
with any much stricter meaning than that of a very large strike. 

The advantage of the general strike has been declared to be that 
"it is a revolution which commences in legal action, with legality," 
and that it is so general that the mobilization of an army of suppres- 
sion would be difficult if not impossible." 

"If you believe in the necessity for maintaining what has been 
called the catastrophic conception — the feeling, that is, that the world 
will only be born again by a complete regeneration, a complete rup- 
ture of the present social structure; if you are persuaded that the 
idea of the social revolution is the necessary symbol which must 
guard in the heart of the workers the sense of the abyss which 
separates the classes, and the gap which exists between capitalist 
society and socialist society ; then you must recognize that nothing 
but the idea of the general strike is capable of creating and develop- 
ing these revolutionary ideas." 



LABOR PROBLEMS 



543 



The most important part of a general strike, however, would be 
a strike of soldiers and police. If this took place while many great 
trades were arrested, a revolution might actually be near at hand. 
"What barricades and refusal of taxes have been to the bourgeois, 
the general strike is for the working-class. It is the ultima ratio 
which enters the scene after all other means have been exhausted." 
It is usually conceived that the shooting of unarmed strikers, inno- 
cent of any crime, is likely to be, at some time or other, a great cause 
of an extension of a small strike into a very large one : the mere 
presence of crowds in the streets has on many occasions been a 
means of spreading an idea. 

A complete disorganization of the means of communication (the 
letter-post and telegraph) would probably produce a greater psycho- 
logical effect (as apart from directly material inconvenience) than 
any other single failure in the routine of society. 

Society, although based on force, is largely carried on by means 
of the knowledge that force can be exerted. The real success of a 
general strike must depend on its generality: if a vast majority of 
the workers of a country ever voluntarily struck, it is no doubt true 
that the entire system of present-day society would be at its end. 
What, however, must usually happen in great strikes is that some 
men are thrown out of work "without in the least sympathizing with 
the strike or its purposes. They will be the shopkeepers, the busi- 
ness men, and great sections of the working-classes. As the strike 
proceeds and the price of food reaches famine levels, and its scarcity 
becomes chronic, the ranks of the malcontents will be increased." 
The point is obvious:. you cannot get in actual fact a division of 
society with all the workers on one side. 

By many, the idea of the general strike will be quickly dismissed 
as a wild fancy, a horror of the night, to which it is not necessary 
to devote serious day thoughts. It may, however, be thought that, 
although the general strike is exceedingly unlikely to take place, 
in days of growing discontent, the possible methods by which a 
strike might really paralyze society are worth considering. 

If all the clerks struck work: ours is a civilization built on 
ledgers, and just imagine — if the money in the rich man's purse was 
all the money he could get because there were no cashiers at the 
bank — if, for want of shipping clerks, no one knew how to send 
goods from Antwerp to Pernambuco — if the builders and decorators 
spent hours in puzzling over the real cost of jobs in order to send 
in estimates to customers, and partners in financial houses, abso- 
lutely unaware what bills were due for payment or who was to do 
what in the multitudinous subsidiary wheels of the details of their 



544 



READINGS IN ECONOMIC PROBLEMS 



business, simply raved uselessly and idly around, in a week no one 
would know whether he was bankrupt or had multiplied his fortune. 
Now let us imagine that there was simultaneously a strike of trans- 
port workers — workers on railways, trams, ships, omnibuses, tubes, 
cabs, and public conveyances of every kind — while the clerks had 
stopped all the bookkeeping, letter-writing, insurance, and record- 
keeping business of the country, and that no one could get to busi- 
ness except by walking — to say nothing of the disorganization of 
home life — the rise in cost of food, injury to health, want of news 
owing to non-delivery of papers, and so on — which would follow. 
If to these two strikes — the clerks and the transport workers — a 
third, that of the coal-miners, be added, it will, without explanation, 
be seen how fearful would be the position of society, if the wage- 
earners ever became even approximately able all to strike work 
together. 

Van Kol declares it to be "an anarchist Utopia;" if it were 
possible because of the strong organization of the working-class and 
their unshakable 'discipline, better means would also be at their 
disposal. The poor would suffer first from the famine caused by it. 
Kautsky says that in a real general strike, as every employer would 
be equally hit, the main weapon of the striker, the fear of losing 
trade to competitors, would be non-existent. Like many others, he 
approves of the political strike intended to obtain definite conces- 
sions from a government, but not of a general economic strike; 
the political strike tends to destroy a government by a direct dis- 
organization of the country governed : it is a contest between the 
cohesive force of the strikers on the one side and of the government 
on the other. The more foolish and feeble the government, the 
better the occasion for striking: also the more unforseen and spon- 
taneous the strike the greater is its effect. 

But the Syndicalist's ideal is precisely the general economic 
strike. 

In so far as men unite, and twenty-five shillings a week does not 
look down on eighteen, the chances of success increase, and the 
general strike becomes more possible. 



X. 

COMPREHENSIVE SCHEMES OF SOCIAL 

REFORM. 

A. THE VOICE OF PROTEST AGAINST SOCIAL AR- 
RANGEMENTS. 

299. A Christian Protest against Private Property. 

BY SAINT BASIL. 

But I ask you what it is that you call yours ? From whom have 
you received it? Yoii act like a man in a theatre, who hastens to 
seize all the seats and prevent the others from entering, keeping 
for his own use what was meant for all. How do the rich become 
rich save by the seizure oi the things that belong tO' all ? The earth 
is given in common tO' all men. Let no man call his own that which 
has been taken in excess of his needs from a common store. The 
bread which you keep back is the break of the hungry ; the gar- 
ment you shut up belongs to the naked. 

300. The Voice of Protest in the Peasant Revolt. 

BY JOHN BALL. 

By what right are they whom we call lords greater folk than 
we? Why do they hold us in serfage? They are clothed in velvet, 
while we are covered with rags. They have wine and spices and 
fair bread ; and we oat-cake and straw, and water to drink. The}' 
have leisure and fine houses ; we have pain and labor, the rain and 
the wind in the fields. And yet it is of us and our toil that these 
men hold their state. 

301. The Non-Democratic Character of Government. 

BY SIR THOMAS MORE. 

Is not that government both unjust and ungrateful that is so 
prodigal of its favors to those that are called gentlemen, or such 
others who are idle, or live either by flattery or by contriving the 
arts of vain pleasure, and, on the other hand, take no care of those 



546 READINGS IN ECONOMIC PROBLEMS 

of a meaner sort, siicli as ploughmen, colliers, and smiths, without 
whom we could not subsist? But after the public has reaped all 
the advantage of their service, and they com,e tO' be oppressed with 
age, sickness, and want, all their labors and the good they have done 
is forgotten, and all the recompense given them is that they are 
left to die in great misery. The richer sort are often endeavoring 
to bring the hire of laborers lower — not only by their fraudulent 
practices, but by the laws which they procure to be made to that 
effect; so that though it is a thing most unjust in itself to give such 
small rewards to those who deserve so well of the public, yet they 
have given tho'Se hardships the name and color of justice, by pro- 
curing laws to be made for regulating them. 

Therefore, I must say that, as I hope for mercy, I can have no 
other notion of all the governments that I see and know than that 
they are a conspiracy of the rich, who, on pretense of managing the 
public, only pursue their private ends, and devise all the ways and 
arts they can find out ; first, that they may, without danger, preserve 
all that they have sO' ill acquired, and then that they may engage the 
poor to toil and labor for them at as low rates as possible, and op- 
press them as much as they please. 

302. The Possibilities of Production. 

FjY RICHARD JE:FPR:e;y. 

I verily believe that the earth in one year can produce enough 
food to last for thirty. Why then have we not enuogh? Why do 
people die of starvation., or lead a miserable existence on the verge 
of it? We have millions upon millions tO' toil from muorning till 
evening just tO' gain a mere crust of bread? Because of the absolute 
lack of organization by which such labor should produce its effects, 
the absolute lack of distribution, the absolute lack of even the very 
idea that things are possible. Nay, even tC' mention such things, to 
say that they are possible is criminal with many. Madness could 
hardly go further. 

303. A Protest against Land Ownership. 

BY J. J. ROUSSEAU. 

The first man, who having enclosed a piece of ground, took 
thought to declare, "This is mine," and found people simple enough 
to believe him, was the real founder of civil society. How many 
crimes, wars, and murders, how much misery and horror would have 



PROJECTS OF SOCIAL REFORM - 547 

been spared the human race if some one, tearing down the pickets 
and filling up the ditch, had cried tO' his fellows, "Beware of listen- 
ing to that imposter ; you are lost if you forget that the land be- 
longs to none and its fruits to all." 

304. Social Protest in the Later Eighteenth Century, 

BY J. B. MC MASTiJR. 

The year 1786 in all the states was one of unusual distress. The 
crops had indeed been good. In many places the yield had been 
great. Yet the farmers murmured, and not without cause, that 
their wheat and their com were of no more use to them than so 
many bushels of stones; that produce rotted on their hands. That 
while their barns were overflowing, their pockets were empty. That 
when they wanted clothes for their families, they were compelled 
to run from village to village to find a cobbler who would take 
wheat for shoes, and a trader who would give everlasting in ex- 
change for pumpkins. Money became scarcer and scarcer every 
week. In the great towns the lack of it was severely felt. But in 
the country places it was with difficulty that a few pistareens and 
coppers could be scraped together toward paying the state's quota 
of the interest on the national debt. 

A few summed up their troubles in a general way, and declared 
the times were hard. Others protested that the times were well 
enough, but the people were grown extravagant and luxurious. For 
this, it was said, the merchants were to blame. There were too 
many merchants. There were too many attorneys. Money was 
scarce. Money was plenty. Trade was languishing. Agriculture 
was fallen into decay. Manufactures should be encouraged. Paper 
should be put out. 

One shrewd observer complained that his countrymen had fallen 
awa)^ sadly from those simple tastes which were the life-blood of 
republics. It was distressing to see a thrifty farmer shaking his 
head and muttering that taxes were ruining him at the very moment 
his three daughters, who would have been much better employed 
at the spinning-wheel, were being taught to caper by a French dan- 
cing master. It was pitable to see a great lazy, lounging, lubberly 
fellow sitting days and nights in a tippling house, working perhaps 
two days in a week, receiving double the wages he really earned, 
spending the rest of his time in riot and debauch, and, when the 
tax-collector came round, complaining of the hardness of the times 



548 READINGS IN ECONOMIC PROBLEMS 

and the want of a circulating medium. Go into any coffee-house of 
an evening, and you were sure to overhear somie fellow exclaiming, 
"Such times! no money to be had! taxes high! no business doing! 
we shall all be broken men." 

305. Labor and Value. 

Wages should form the price of goods ; 

Yes, wages should be all ; 
Then we who work to make the goods. 

Should justly have them all ; 
But, if their price be made of rent, 

Tithes, taxes, pro'fits all. 
Then we who work to make the goods 

Shall have just, none at all. 

306. Expanding Wants and Social Unrest. 

BY A re;tire;d capi; cod captain. 

Yes, that's the trouble. My father wanted fifteen things. He 
didn't get 'em all. He got about ten, and worried considerable be- 
cause he didn't get the other five. Now, I want forty things, and 
I get thirty, but I worry more about the ten I can't get than the 
old man used to- about the five he couldn't get. 

307. How the Poor Live in Manchester. 

BY PRIvDERlCK ENGELS. 

The manner in which the great multitude of the poor is treated 
by society to-day is revolting. They are drawn intO' the large 
cities where they breathe a poorer atmosphere than in the country ; 
they are relegated to districts which, by reason of the method of 
construction, are worse ventilated than any others ; they are de- 
prived of all means of cleanliness, of water itself, since pipes are 
laid only when paid for, and the rivers so polluted that they are 
useless for such purposes ; the}'^ are obliged to throw all offal and 
garbage, all dirty water, often all disgusting offal and excrement 
into the streets, being without other mieans of .disposing of them. 
As though the vitiated atmosphere of the streets were not enough, 
they are penned in dozens into single rooms, they are given damp 
dwellings, cellar dens that are not waterproof from below, or gar- 
rets that leak from above. Their houses are so built that the clam- 
my air cannot escape. The view from the bridge is characteristic 
of the whole district. At the bottom flows, or rather stagnates, 



PROJECTS OF SOCIAL REFORM 



549 



the Irk, a narrow, coal-black, foul-smelling stream, full of debris 
and refuse, which it deposits on the shallower right bank. Every- 
where heaps of debris, refuse and offal ; standing pools for gutters, 
and a stench which alone would make it impossible for a human 
being in any degree civilized to live in such a district. The whole 
side of the Irk is built in this way, a planless, knotted chaos of 
houses, more or less on the verge of uninhabitableness, whose un- 
clean interiors fully correspond with their filthy external surround- 
ings. In truth it cannot be charged to the account of these helots 
of modern society if their dwellings are not more cleanly than the 
pigsties which are here and there tO' be seen among them. My de- 
scription is far from black enough to convey a true impression of 
the filth, ruin, and uninhabitableness, the defiance of all considera- 
tions of cleanliness, ventilation, and health which characterize this 
district. 

308. Back of the Yards in Packingtown. 

BY A. M. SIMONS. 

From the general air of hoggishness that pervades everything 
from the general manager's offices down to the pens beneath the 
buildings and up tO' the smoke that hangs over it all, the whole 
thing is purely capitalistic. One's nostrils are assailed at every 
point by the horribly penetrating stench that pervades everything. 
Great volumes of smoke roll from the forest of chimneys at all 
hours of the day, and drift down over the helpless neighborhood like 
a deep black curtain that fain would hide the suffering and misery 
it aggravates. The foul packing-house sewage, too horribly oft'ens- 
ive in its putrid rottenness for further exploitation even by monop- 
olistic greed, is spewed forth in a multitude of arteries of filth into 
a branch of the Chicago River at one corner of the Yards, where 
it rises to the top and spreads out in a nameless indescribable cake 
of festering foulness and disease-breeding stench. On the banks 
of this sluiceway of nastiness are several acres of bristles scraped 
from the backs of innumerable hogs and spread out to allow the 
still clinging animal matter to rot away before they are made up 
into brushes. Tom Carey, now alderman of this ward, owns long 
rows of some of the most unhealthy houses in this deadly neighbor- 
hood. These houses have no connection with the sewers, and un- 
der some of them the accumulation of years of filth has gathered 
in a semi-liquid mass from two to three feet deep. Shabbily built 
in the first place and then subjected to years of neglect, they are 
veritable death-traps. A cast-iron pull with the Health Depart- 
ment renders him safe from any prosecution. 



550 RBADINGS IN BCONOMIC PROBLEMS 

B. SOME CONSERVATIVE PROGRAMS OF INDUSTRIAL 

REFORM. 

309. Cooperation. 

BY PIENJRY FAWCErTT. 

It has been frequently stated, that wealth cannot be produced 
without the application of capital and labour; the economy of our 
country is such, that the capital and labour are seldom supplied by 
the same individuals. Yet it is manifest that there need not neces- 
sarily be two distinct classes termed, respectively, employers and 
employed ; for the labour and the capital required to produce wealth 
might be provided by the same set of individuals. If this were 
done, those who* labour would enjoy as their own property all the 
wealth that was produced. Such a union of capital and labour 
defines what is termed the principle of cooperation. 

The ready money system which is invariably adopted by co- 
operation societies has proibably promoted their prosperities more 
than any other circumstance. All bad debts are thus avoided, and 
when credit is not given, a certain amount of business can be trans- 
acted with much less capital than would be required if large sums 
were locked up in book-debts. When goods are sold for ready 
money, they can also be bought for ready money from wholesale 
dealers. This is always a guarantee that the purchases will be 
made on the most favourable terms. Again, the sharehodders of the 
society form a nucleus of customers, and therefore, directly busi- 
ness is commenced, a certain amount of trade is insured. If an 
individual commences a business, he must incur great initial ex- 
penses in attracting customers ; but a cooperative society is saved 
all such expenses, for its shareholders are its customers. There 
are, however, some counterbalancing disadvantages, for instance, 
the manager who is paid by a company is rarely so energetic, so 
skillful, and so generally efficient as the individual owner of a bus- 
iness. Again its range of appeal is very limited. It has been shown 
that the business done in groceries amounts to at least ten times 
the business done in articles of clothing. The reason for this is 
that groceries are easily standardized ; while, in articles of dress, 
one prefers to follow his individual tastes, and does not care to 
restrict himself to a single shop. 

The advantages which the working classes derive from a co- 
operative store are very apparent. In the first place, it provides 
them with the most eligible investment for their savings. Even 
the middle and upper classes are much influenced in the amount 



PROJECTS OF SOCIAL REFORM 551 

they save by the profit which they expect thus to reahze on their 
capital. This opportunity for investnient prevents the laboring 
class from being' improvident. lyaborers are in another way greatly 
benefited by dealing at a cooperative store, for these establishments 
give no credit ; and nothing has been a greater bane to the working 
man than the facility with which he is permitted to get into debt. 
These societies promote a most healthy social intercourse between 
workmen ; for at frequent meetings the shareholders consult each 
other upon matters of business. A cooperative society may estab^ 
lish reading-rooms, organize excursions, and carry on like social 
undertakings. A cooperative store may, moreover, become a par- 
ticularly powerful agent in benefiting the working classes, because 
it can be conducted on the smallest possible scale. The experiment 
can be made without involving any expense ; any half dozen work- 
ing men may try the plan. If they find their first efforts successful, 
they may gradually develop their plan, until at length it becomes 
a. great and important trading establishment. 

Laborers have sometimes applied the cooperative principle to 
various branches of industry, with the view of appropriating to 
themselves the profits which are realized by capitalists. If success- 
ful great pecuniary advantages are derived by the laborers. It will 
be instructive somewhat further to analyze the benefits which are 
thus conferred. In the first place, it may be observed, that the 
labourers receive the whole profits which result from their industry, 
because they themselves supply the capital which is required. An- 
other most important effect seems likely to result for they hold a 
fair prospect of being able to discourage the present tendency to- 
wards concentration of wealth. For the industry of the country 
must be conducted by twO' distinct classes, namely: employers, who 
supply the capital, and workmen, who provide labour; unless those 
who labour agree to form themselves into associations, and sub- 
scribe amongst themselves sufficient capital to carry on production 
upon a large scale. It must be quite evident, that cooperative trad- 
ing establishments, when successful, intensify many of the advan- 
tages which labourers derive from cooperative stores. But we have 
separately described these two classes of institutions, because we 
think that the success of the former may be imperilled by many 
circumstances which do not affect the latter. 

Let us therefore enquire, Avhether a cooperative trading society 
'enters into the competition with any particular advantages or dis- 
advantages. In our opinion, some special advantages pertain to a 
cooperative trading society, because the capital required is supplied 
hy the labourers; consequently each individual who is employed 



552 READINGS IN ECONOMIC PROBLEMS 

participates in the proiits that are realised, and has therefore a 
direct interest in the work in which he is engaged. Hence all those 
feelings are called forth which stimulate the energy and activity 
of the employer; the workman is no longer listless and pathetic, 
but, as has been well said, cooperation secures the most efficient 
workmen, and calls forth their best efforts. The principle is, per- 
haps, not capable of application to all trades, for instance, it can- 
not easily be applied to the cotton industry, for there periods of 
great activity have always been succeeded by times of corresponding 
depression. In fact any cooperative trading establishment is a 
much more hazardous undertaking than a cooperative store ; for 
the former is liable to be prejudicially affected by dullness of trade, 
whereas a cooperative store is subject to no such fluctuations in 
prosperity; the main object it has in view is to supply the labourers 
with the first necessaries of life, and the demand for these does not 
vary greatly from year to year. Those who establish a cooperative 
trading society ought most rigidly to' observe the rule, that none 
but those who subscribe capital should be employed as labourers. 
Such a regulation will provide the best guarantee against the un- 
fortunate error of allowing to enter the labor-capital question 
which it is the very purpose of the existence of the societv to^ ex- 
clude. We trust that the rapid extension of these establishments, 
which is at the present time taking place throughout the country, may 
continue. The trade to which the cooperative principle is applied 
ought not to be of a speculative nature, and we therefore think that 
it was perhaps a somewhat hazardous experiment to found a co- 
operative cotton mill. It is quite possible that a farm, for instance, 
might with great advantage be cultivated by associations of labour- 
ers. In conclusion, we will only further state that the cooperative 
principle can be most advantageously applied to* those branches of 
industry whose success is mainly determined by the skill, care, and 
energy of the individual workman, for it cannot be denied but that 
cooperation must call forth all those qualities upon which the effi- 
ciency of the workman depends. 

310. Profit-Sharing. 

BY HENRY R. SEAGE^R. 

One criticism urged against the present industrial system is that 
workmen, upon whose labour and fidelity the success of business 
undertakings so largely depends, receive no share of profits. To 
give workmen a keener interest in their work various expedients 
have been devised, all of which may be described as fonns of profit- 
sharing. 



PROJECTS OF SOCIAL REFORM 553 

One of the simplest methods of profit-sharing- is that which 
causes wages to vary on a sliding scale with the price of the pro- 
duct. This has long been common in the mining and iron and 
steel industries of Great Britain, and is not unusual in the same in- 
dustries in the United States. It is, however, open to grave ob- 
jections, unless standard rates of wages are established as a mini- 
mum below which earnings are not to be depressed, no matter how 
low the price of the product may become. In every branch of in- 
dustry prices are subject tO' variation and tend at times tO' fall below 
the normal expenses oi production. The force which is relied upon 
to restore them at such periods is the unwillingness of entrepre- 
neurs to continue production at a loss. Under the sliding-scale 
system, wages, a principal item among the expenses of production, 
fall as prices fall. The consequence may be that entrepreneurs can 
still produce at a profit even when the price is too low to afford a 
fair return to wage-earners. Under such circumstances the force 
relied upon to restore prices is removed and they may for some 
time remain below the level which permits a fair competitive re- 
turn to all parties. Of course, workmen will gradually withdraw 
from such poorly paid employments, and i|i this way the equilib- 
rium may in time be restored, but it is also possible that in the 
interval whole groups may suffer a permanent lowering of their 
earning capacities and standards oi living. A sliding-scale method 
of remuneration which has not as its basis minimum wages is thus 
a m'cnace tO' the permanent well-being of the wage-earning class. 
Another objection to the sliding scale is that it assumes a con- 
stancy of relation between the price of the product and the amount 
of the profits that does in fact exist. Thus, anthracite coal-mine 
owners in the United States objected to the application of the sys- 
tem to that industry by the award of the Strike Commission already 
referred to, on the ground that their expenses oi production were 
growing each year heavier as the mines grew deeper, and that 
higher prices in the future would add nothing to their profits and 
consequently give rise to no fund to be shared with their employees. 
There can be no doubt that changes in prices are too inaccurate 
indices of changes in profits to permit the extension of the sliding 
scale system to many branches of business. 

A less objectionable, if more complex, method of sharing profits 
is for the entrepreneur to appraise his own services as worth a 
certain wages of mianagement and to agree to distribute all profits 
above this sum to- his employees — including himself as salaried 
manager — in proportion to^ the wages which they respectively re- 
ceive. Such a distribution of profits, if fairly carried out, offers the 



554 READINGS IN BCONOMIC PROBLEMS 

highest incentive to all employees to contribute their maximum to 
the success of the business. If anything, it errs on the side of be- 
ing overgenerous to^ workmen, since they are guaranteed their 
wages whether there are any profits to distribute or not, whereas 
the wages of management of the entrepreneur can be paid only 
when profits equal at least to this amount have been raised. To 
obviate this difficulty it has sometimes been attempted tO' scale 
down wages proportionately when losses result in businesses which 
have adopted the practice of sharing profits. Logical as such a 
plan may seem, it is open to the fundamental objection that it 
makes workmen suffer for the mistakes of their employers. So 
long as the former have no- voice in the management of the busi- 
ness in which they are engaged, they may rightly demand standard 
wages. If the employer is willing to ofifer them in addition a share 
of his profits, they should and usually will show their appreciation 
by attending more carefully to his interests. They should not be 
asked to share losses, however, as this would interfere with that 
elimination of unfit employers upon which progress so largely de- 
pends. 

Besides the plans for sharing profits described above, there are 
dozens of others of varying degrees of complexity. In mercantile 
trade it is not unusual tO' compensate salesmen with a certain per- 
centage of their gross sales in addition to their salaries. Corpor- 
ations are increasingly in the habit of paying bonuses to- their em- 
ployees out of the profits of each year's business. Several of them 
have introduced elaborate plans, such as that of the United States 
Steel Corporation, for selling stock tO' their employees on favourable 
terms and paying them a premium: in addition to the usual dividend 
on condition that they retain the stock and with it an interest in the 
success of the enterprise. Some of these plans have been adopted 
upon humanitarian grounds, but most of them are simply enlight- 
ened expedients for increasing the interest which hired workmen 
feel in the cjuality and quantity of their work. Modern business is 
a vast system of cooperation, and the principal criticism, from' the 
point of view of production, that is to be urged against it is that the 
cooperation is so often grudging and half-hearted. Profit-sharing 
is a device for bridging over the gulf between employers and em- 
ployees by making the incomes of both depend directly upon the 
amount of profits. When adopted as a supplement to the payment 
of wages at standard rates it merits only commendation. It in- 
creases the productiveness of labour by giving workmen a livelier 
interest in the results of their toil. It adds to wages and thus per- 
mits workmen to attain to hiarher standards of living at the same 



PROJECTS OF SOCIAL REFORM 



555 



time that it facilitates the accumulation by them of capital. Finally, 
it renders the relations between employers and employees more cor- 
dial, and in this way prevents strikes and lockouts. Those who ob- 
ject to profit-sharing do so on the ground that it is a mere palliative, 
when what is needed is a radical change in the present industrial 
system. 

311. The Premium Wage-Plan. 

BY F. L. HALSEY. 

To gather the exact workings of the premium plan assume a 
concrete case. A workman is paid say S3 per day and produces 
one piece of a kind per day, that is, in ten hours. He is told that 
he will continue to be paid his $3 a day as before, but that if he 
will reduce the time on the piece he will be paid in addition to his 
wages a premium of 10 cents for each hour saved. If he reduces 
the time by an hour, that hour represents in money value a gross 
saving of 30 cents. Ten cents of this amount is paid to him as a 
premium, leaving the remaining 20 cents in the employer's posses- 
sion. If the w^orkman goes on reducing the time in which the piece 
is made, the same process is repeated, each hour saved resulting in 
an increase in the workman's wages of 10 cents and in a reduced 
cost of the piece of 20 cents. In other words, the wages go up and 
the costs go down simultaneously, this apparently paradoxical re- 
sult coming about from the fact that the gross time saved is divided 
between employer and employee. 

There is of course a considerable gain to the employer due to 
the increased production from a given plant, since the secondary 
costs of production — the expense items which make up the burden 
and which must be added to the cost of labor and material in o-rder 
to obtain the ultimate or true cost — are increased but little in con- 
sequence of the intensified production. 

It will be seen that superficially the plan has some resemblance 
to the profit-sharing plan. The chief difference is that whereas the 
profit-sharing plan treats the business as a whole and the w^orkmen 
in a body, the premium plan treats each individual and his work 
separately. Under the profit-sharing plan the gross profits at the 
end of the year are determined and a certain percentage of these 
is divided among the workmen regardless of individual merit, 
whereas under the premium plan each workman's earnings depends 
solely upon his own eft'orts. As outlined above the premium plan 
is a verv simple thing, an almost absurdly simple thing, and it w^ould 
seem to be so obviously correct in principle as to be accepted with- 



556 READINGS IN ECONOMIC PROBLEMS 

out question. It has, however, required much time and effort to 
get it tried. 

The first question to be decided after the adoption of the plan 
has been determined upon is the rate of the premium., that is, what 
proportion of the value of the time saved is tO' be given to the work- 
man who saved it. For this there is a perfectly clear principle to 
guide us and that principle is precisely the one which we use in 
buying anything whatever with money, namely, to pay what is nec- 
essary to get what is wanted but tO' pay no more. If we have a 
fence to paint or a roof to shingle, the only principle we ever think 
O'f following in order to get the work done is to^ pay enough to- in- 
duce some ome to do it. If we offer less than that the work will 
go undone, while if we pay more the surplus is a simple gratuity. 

Looked at from this standpoint it is clear that there can be no 
single rate of payment which will apply to all classes of work; In 
the machine shop, for example, increased output is largely a matter 
of intelligence. The workman uses coarser feeds, higher speeds, 
and deeper cuts. He has several tools at hand and grinds one while 
another is at work so that as soon as one is dull another may be 
slipped into its place without loss of time. In other words, he 
crowds the machine rather than himself. In the blacksmith shop 
or foundry, however, increased^outpiit can; be secured only by actual 
increased muscular effort by the workman. It is clear that in the 
first instance a smaller premium will suffice than in the others. 

Looking at the premiums when settled in accordance with this 
simple principle of paying what is necessary but nO' more, we learn 
several things, of which the first is that they are in no sense bonuses 
or gratuities, but that, on the contrary, they are, in the fullest sense 
oi the word, earnings. We learn, secondly, that they do' not need 
to be cut from time tO' tiniic, but that so long as the methods of pro- 
duction do not change the rates may be permianent. If the rates 
have been settled in accordance with this principle there need, how- 
ever, be no change in them so long as the methods of production 
remain the same, and indeed there must not be. Such cuts would 
introduce the objections of piecework and destroy the workman's 
confidence in the system and with it his incentive to further effort. 

With the rates set in this manner we see, thirdly, that with 
a single limitation we have secured an ideal economic condition, a 
condition under which and under given methods of production we 
will obtain the highest possible production and the lowest possible 
cost, while the workman will receive the highest wages to which he 
is economically entitled. In other words, we will secure the max- 
imami. possible efficiency of plant. 



PROJECTS OP SOCIAL RBPORM 557 

C. THE SOCIAL PROBLEM OF RENT. 
312. Increases in Land Values in the Fifteenth Century. 

BY THEROLD ROGE^RS. 

During the fifteenth century, notwithstanding the difficulties and 
losses of the landowner, the value of land rose rapidly. In the four- 
teenth century it was constantly obtained for ten years' purchase, 
the amount of land in the market being' probably so abundant, and 
the competition for its purchase so slight, that it easily changed 
hands at such a rate. Land was valued at twenty years' purchase 
in the middle of the fifteenth century. 

313. Rents in the Sixteenth Century. 

BY HUGH I.x\TlMER. 

Land which went heretofore for twenty or forty pounds a year 
now is lent for fifty or a hundred. My father was a yeoman, and 
had no lands of his own, he had a farm at a rent of three or four 
pounds by the year at the uttermost ; and thereupon he tilled so 
much as kept half a dozen men. He had walk for a hundred sheep, 
and my mother milked thirty kine. He kept me to school ; he mar- 
ried my sisters with five pounds apiece, so^ that he brought them up 
in godliness and fear of God. And all this he did of the same farm 
where he that now hath it payeth sixteen pounds rent or more by 
the year, and is not able to do anything for his prince, for himself, 
nor for his children, nor to give a cup of drink to the poor. 

314. The Power of Lant^lords. 

BY THOMAS SPENCE- 

And any one of them (the landlords) still can, by laws of their 
own rnaking, oblige every living creature to reinove off his prop- 
erty ; so, of consequence, Avere all the landholders to be of one mind, 
and determine to take their own properties into their own hands, 
all the rest of mankind might go- toi heaven if they would, for there 
would be no place found for them here. Thus men may not live in 
any part of this world, not even where they are born, but as strang- 
ers, and by the permission of the pretender to the property thereof. 



558 READINGS IN ECONOMIC PROBLEMS 

315. The Influence of Rents on Trade and Commerce. 

BY A. o'cONNOR. 

What are the circu-mstances under which manufacturing indus- 
try is carried on in this country in respect of the use of land? With 
the falling in of leases so much higher a ground rent is charged 
that even with an increase of business there is less profit. Not only 
in London does the amount paid for the occupation of ground bear 
a higher proportion to the profits of trade than it formerly did, but 
in Birmingham too, where trade prices have been lowered, profits 
reduced, and wages are less, and where there are large numbers of 
persons vainly seeking employment, the price which has to be paid 
for the use of land has increased. The evidence on this point from 
Sheffield, again, was of the clearest; and it was shown that in Jar- 
row, which the shipbuilding industry may be said to have created, 
the landowners draw from the earnings of the industrial classes an 
immense income in consideration of the occupation of ground the 
improvement in the value of which is in no way attributable to them. 
And so of other places. As in the agricultural and mining districts, 
so in the industrial and manufacturing centres, the amounts which 
have to be paid for the use of land constitute a burden upon indus- 
try which is constantly becoming heavier, both absolutely and rela- 
tively. It thus appears that over the entire country there is a cause 
at work — general, permanent, and far-reaching — afifecting every 
branch of industry, in mine, and farm, and factory, the efifects of 
which are traceable in the languishing condition of the agricultural, 
and the mining, and the manufacturing interests. That cause is 
the fact that under the existing land system the owners of the soil 
are able to obtain, and to exact, so large a proportion of the pro- 
ceeds of the industry of the United Kingdom that the remainder 
is insufficient to secure adequate remuneration to the industrial 
classes, either in the shape of wages to operatives or reasonable 
profit to the organisers of labour, the employers, or capitalists. 

316. Land Speculation in America. 
a) A Land Boom in Iowa. 

BY ALFRED RUSSEL WALLACE. 

I stayed some time in a growing city in Iowa, called Sioux City, 
which has a population of 20,000. They were having what is called 
a land boom — ^every city tries its best to have one — 'We should call 
it a land fever; and the consequence was that land which sold at 
$50 an acre three years ago was selling at $750. It was two miles 



PROJECTS OF SOCIAL REFORM 559 

from the city and it was sold with the idea that the city would soon 
stretch out, and reach it. In the residential suburbs the price ob- 
tained was $22,000 an acre, and in the centre of the city it was 
$200,000 an acre. In the town of Sahna, in Kansas, with a popu- 
lation of only 8,000, land in the suburbs is now selling at $22,000 
an acre, and in the centre of the town at $150,000 an acre. Here 
also they have had a boom, and land has doubled in value in a few 
months. 

b) A Land Boom in California. 

BY A. H. MORTIMER. 

The area of the city of Los Angeles, forty square miles, was not 
sufficiently extensive for the speculators in city lots. Suburbs were 
laid out on every side, and upwards of a hundred cities were pro- 
jected wnthin forty miiles of the city. Many of these cities have no 
inhabitants as yet and never will have any. It is no exaggeration 
to say that city lots were surveyed and staked out in the county of 
Los Angeles sufficient for a population of several millions. In the 
period of the boom land was sold and resold at intervals of a few 
weeks, the price being considerably advanced on every sale. The 
small profits from the cultivation of the soil were despised, and 
many fine orchards and villages were neglected. Many of the boom 
cities have reverted to farming land. I am informed that lots which 
sold for $15,000 to $20,000 during the boom cannot now be sold for 
$500. 

317. Urban Growth and Overcrowding. 

There is overcrowding in Berlin. It is a consequence of the 
income of the people not keeping pace with the increase in rents. 
The result is that thousands of people, in inferior positions, who 
formerly rented two or three rooms, are now compelled to be con- 
tent with two or one. Thousands of laboring families living in the 
backhouses O'f the overcrowded suburbs seek a way out of their 
difficulty by letting the single furnished room to two or three 
lodgers, while husband, wife, and children live in the kitchen. 

318. The Social Importance of Rent. 

BY AI.FRED RUSSEIv WALLACE. 

Rent is the equalizer of opportunities, the means of giving fair 
play to all cultivators of the soil in the struggle for existence. Farms 
differ greatly in value because of differences in fertility and differ- 
ences in location as regards the market. The owner of a very fer- 
tile farm near the railroad has quite an advantage over one whose 



56o READINGS IN ECONOMIC PROBLEMS 

farm is less fertile and far removed from the main lines of com- 
munication. It is just the same with shops and stores. The busi- 
ness done, other things being equal, will depend upon the location. 
Now prices are fixed by the competition of the whole of the stores 
or farms. Because of the strength of the more favored class, were 
there no rents, the less favored class would be driven out and the 
whole business absorbed by their more fortunate rivals. But if all 
these shops belong to landlords, whether private individuals oir 
municipalities, then rents will be so much higher in one case than 
in the other as to equalize the opportunities of both. Both will then 
be able tO' earn a living for a time, and the ultimate superior success 
of either will be a matter of business capacity. The competition 
between them will be fair and equal. 

The same thing happens with rival manufacturers. Facilities 
for getting raw materials, cheapness of power, enable one to under- 
sell another, and ultimately to drive him out of the market, unless 
the former is subjected to an increased rent, to compensate for his 
advantage of position. 



D. THE THEORY OF THE SINGLE TAX. 
319. The Social Injustice of Rent. 

BY HENRY GEORGE. 

The coal and iron fields of Pennsylvania, that today are worth 
enormous sums, were fifty years agO' valueless. What is the efficient 
cause of the difference? Simply the difference in population. The 
coal and iron beds of Wyorning and Montana, which today are 
valueless, will in fifty years from now be worth millions on mil- 
lions simply because in the meantime population will have greatly 
increased. 

The man who sets out from the Eastern seaboard in search of 
the margin of cultivation, where he may obtain land without pay- 
ing rent, must, Hke the man who swam a river to get a drink, pass 
for long distances through half-tilled farms, and traverse vast areas 
of virgin soil, before he reaches the point where land can be had 
free of rent. He is forced so much further than he otherwise need 
have gone by the speculation which is holding these unused lands 
in expectation of increased value in the future. 

That land speculation is the cause of individual depression is 
clearly evident. In each period of industrial activity land values 
have steadilv risen, culminating in speculation, which carried them 



PROJECTS Of SOCIAL REFORM ' 561 

in great jumps. This has been invariably followed by a partial ces- 
sation of production accompanied by a commercial crash; and then 
has succeeded a period of comparative stagnation, during which 
again the equilibrium has been slowly established, and the same 
round has been run again. 

Land can yield no wealth without the application of labor ; labor 
can produce no- wealth without land. These are the two^ ecjually 
necessary factors of production. Yet to say that they are equally 
necessary is not to say that in the making of contracts as to distri- 
bution, the possessors of the two meet on equal terms. For the 
nature of the two factors is very different. Land is a natural ele- 
ment ; the human being must have his stomach filled every few 
hours. Land can exist without labor ; but labor cannot exist with- 
out land. Land can lie idle for years, and it will eat nothing. But 
the laborer and his family must eat every day. And so in the mak- 
ing of terms between them the landlord has an immense advantage. 
And, further than this, as population increases, as the competition 
for the use of land becomes more and more intense, so are the 
owners oi land enabled to get for the use of their land a larger and 
larger part of the wealth which labor exerted upon it produces. 
That is to say the value of land steadily rises. This steady rise 
brings about confident expectations of future rises of value, which 
produces among landowners all the effects of a monopoly to hold 
for higher prices. Thus there is a constant tendency to force mere 
laborers to take less and Jess or to give more and more of the pro- 
ducts of their work for the opportunity to work. In course of time, 
in any society, some of the people are able to take and enjoy a sup- 
erabundance of all the fruits of labor without doing any labor at 
all, while others are forced to work the livelong day for a pitiful 
living. 

320. The Benefits of Improvements. 

a) BY ADOr,PH WAGNER. 

The great expenditure of the State out of the resources of the en- 
eire population, and with the increasing population, for the most part 
out of the resources of those who do not own land, for street san- 
itation, education, etc., has ultimately the tendency to increase the 
height of rent and the value of property in urban lands and build- 
ings, because the increase in the urban population is thereby fav- 
ored. In such cases the uAan landowner profits doubly, and the 
landless population pays in taxes the money for expenditure which 
indirectly leads to a new increase in rents, thus suffering in two 
ways. 



562 READINGS IN ECONOMIC PROBLEMS . 

b) BY THEROLD ROGERS. 

Every permanent improvement of the soil, every railway and 
road, every bettering of the general condition of society, every fa- 
cility given for production, every stimulus supplied tO' consumption, 
raises rent. The landowner sleeps, but thrives. He alone, among 
all the recipients in the distribution of products, owes everything 
to the labor of others, contributes nothing of his own. He inherits 
part of the fruits of present industry, and has appropriated the lion's 
share of accumulated intelligence. 

321, The Theoretical Basis of the Single Tax, 

BY C. B. EIELEBROWN. 

The argument in favor of the single tax may be put briefly as 
follows: The three economic legs necessary and sufficient where- 
upon the single tax stool may firnily stand are found in three 
generic peculiarities quite exceptional in their nature, which dis- 
tinguish land from man-made products. The failure to recognize 
this distinction is sufficient to- account for the crookedness of the 
present system of taxation. These three attributes, firmly grounded 
in orthodox economics, are as follows : a. The site value of land 
is a social product, b. A land tax cannot be shifted, c. The selling 
value of land is an untaxed value. These three fundamentals are 
worthy of brief separate consideration. 

First in order is that land value is a . social product, that it is 
created principally by the community through its activities, indus- 
tries, and expenditures. The value of land is based upon economic 
rent, "what land is worth for use." Strictly speaking this worth 
for use attaches itself not only to the ground but to scores of things 
exterior to it and through it made available for use. In practice 
the term land is erroneously used tO' include destructible elements 
which require constant replacement ; but these form noi part of the 
economic advantage of situation. Ground rent may be said to result 
from at least three distinct causes, all of which are connected with 
aggregated social, as distinct from individual, activity: i. public 
expenditure ; 2. quasi-public expenditure ; 3. private expenditure. 
Thus their very nature and origin would seem tO' point to land val- 
ues as peculiarly fitted to bear justly the burden of taxation. 

Second in order is the fundamental fact that a tax upon ground 
rent cannot be shifted upon the tenant in increased rent. Ground 
rent is determined, not by taxation, but by demand. Ground rent 
is the gross income, a tax is a charge upon this income. A tax may 
be conceived of as a lien upon land held by the state. It affects the 



PROJUCTS OP SOCIAL RBPORM 563 

relations between owner and state ; it has no- bearing upon the rela- 
tions between owner and tenant. Tax is simply the name of the 
grO'Ss ground rent which is taken by the state in taxation, the other 
part going to the owner. The greater the tax the smaller the net 
rent to the owner and vice versa. Ground rent is "all that the traffic 
will bear." The owner gets all he can for the use O'f his land 
whether the tax be light or heavy. Putting more tax upon land will 
not make it worth more for use. 

Third is the necessary corollary that the selling value of land 
is an untaxed value, a proposition which has not been seriously 
questioned by economists. Every purchaser of a piece of property 
knows without argument that he is governed as to the price he will 
pay, not by the gross income, but by the net 'income that will re- 
main to him after all charges and incumbrances have been dis- 
charged. Land owners who invest to-day are entirely exempt from 
taxation. It is in the very nature of things that the burden of a 
land tax can not be made to survive a change of ownership. 

If it is admittedly wrong that present land values should be un- 
taxed, how can such fiscal wrong best be righted? Begin at once a 
transfer of taxes from improvements to land, so^ gradual that two 
old injustices will cease for every new one that is begun, until this 
untaxed value is made tO' bear at least its proportionate burden at 
the same rate with other things. If economists and taxation ex- 
perts will quit their dead reckoning and steer their craft by the 
single-tax polestar, time and tide will do the rest. 

322, A Criticism of the Single Tax. 

BY CHARLES J. EULI^OCK. 

In studying Mr. George's plans for land nationalization, the fol- 
lowing considerations are important : 

In one sense of the word, economic rent may be called an un- 
earned income; yet it accrues mainly to people who' incur the risks 
of investing in land, and cannot be secured without the exercise 
of foresight. Now, Mr. George assumes that such investors never 
lose, but always gain. This is far from: true. At present, investors 
run the risk of loss when they purchase land and improve it. This 
risk is counterbalanced by the prospect oi an increase in economic 
rent. Mr. George would have the State appropriate all such incre- 
ments of economic rent, while investors would bear all the losses 
on improvements that should become unprofitable on account of 
changes in the direction of the growth of the community. The 
late President Walker said, justly, "Heads I win, tails you lose, is 



564 READINGS IN ECONOMIC PROBLEMS 

not a game at which the State can, in fairness or decency, play a 
part." If the State takes from an investor all increments of rent 
due to social causes, it should guarantee him from losses on capital 
invested in improvements, provided' that those losses result from 
social causes over which he has no control. 

As a revenuie measure, the single tax would often prove a dis- 
appointment. In England, for instance, the rents of practically all 
agricultural lands have steadily fallen for more than twenty years. 
If the English government had bought out all owners of agricultural 
lands at the time when The Land Tenure Reform Association pro- 
posed such a course, it would have made a decidedly bad investment. 
In many states of our Union the same thing is true of agricultural 
rents, while it has occurred repeatedly in cities. 

We must admit that a large unearned increment of ground rents 
is secured by the owners of specially favored lots. No one would 
question the justice of imposing a part of the burden of taxation 
upon such an income ; but we should not forget that there are other 
unearned incomes besides those secured from some pieces of land. 
When a monopo-ly of any sort develops an unusually profitable field 
of investment, part of the monopoly profits are an unearned income, 
and should be taxed also. As a simple matter of fact, all those 
persons who have the good fortune to be favorably affected by each 
actual turn of social development are likely to receive unearned in- 
comes. It is just to tax all of these incomes whenever they can 
be reached with certainty ; but to tax them all -away is quite a differ- 
ent matter. Finally, in the United States, there are practically no 
restrictions upon the purchase or sale of land. Any unearned in- 
crement is likely to be distributed quite widely, because landowned- 
ship is widely extended. 

Mr. George's plan of confiscating the value oi land without 
compensating present owners does not appeal to the conscience of 
the average American as just. Society has allowed private land- 
ownership in this country ever since English settlement. The pres- 
ent owners have invested in land in good faith. If it should be 
decided inexpedient to continue our present system, the burden of 
the change should not be thrown upon the single class of land- 
owners. 

323. Land Nationalization. 

BY CPIARI,ES GIDE. 

One scheme for the attainment of social justice wouild be to do 
away with perpetuity in landed property, and would make it resem- 
ble what lawyers call an emphyteusis, or more simply, a temporary 



PROJECTS OF SOCIAL REFORM 565 

concession. The State, as nominal proprietor of the land, would 
grant it to individuals for the purpose of working it, for periods of 
long duration, for fifty, seventy, or even ninety-nine years, as is the 
case with railway concessions. On the expiration of the term the 
State would re-enter in possession of the land, and would then grant 
it again for a fresh period. But the obtainers of the new concession 
would now have to pay the equivalent of the surplus value, by which 
they would benefit, either in the shape of a lump sum or as an an- 
nual rent. In this manner the State, as the representative of col- 
lective society, would receive the whole of the unearned increment, 
which would sooner ot later bring in an enormous revenue. 

Such a system would not be irreconcilable with an effective cul- 
tivation of the land, as is too hastily asserted, especially if care was 
taken to renew the concessions some time before the expiration of 
the term. Certainly such a system would be more conducive to suc- 
cessful farming than the actual state of things in countries such as 
Ireland, or even England, where almost the whole of the land is 
cultivated by tenants at will, whot can lose their tenancies at the 
landlord's pleasure. 

The execution of such a project would meet with an insurmount- 
able obstacle in the prior operation of the buying back of the land, 
if that were done with due regard to equity, for that operation 
would be absolutely ruinous. Talce the case of France. The total 
value of landed property in France may be estimated to^ be $20,000,- 
000,000 sterling. Let us grant that the purchase could be effected 
at this price ; then it would be necessary to borrow that sum. Let 
us further suppose that so huge an issue of bonds would not damage 
the credit of the State, and that it could still borrow at 4%. Even 
then $800,000,000 would have to be entered on the expenditure side 
of the accounts of the State. On the other hand, we should have 
henceforward to deduct from the receipts all the taxes that at pres- 
ent fall upon land, for these would clearly be wiped out by confiisio, 
the creditor and the debtor being one and the same. Thus the deficit 
would be nearly $1,000,000,000. True enough, per contra, the State 
receipts would be increased by the whole amount of rents; but. ac- 
cording to the same statistics, the net return from land is a little 
less than 3 per cent. If, once more, we grant that the State would 
be able to work the land as profitably as private persons can. the 
receipts under that head would be less than $600,000,000, though the 
effects of the law of surplus value would bring about a progressive 
increase. Thus, when all is said and done, the finances of the State 
would for a long period be burdened by an enormous deficit, which 



566 READINGS IN ECONOMIC PROBLEMS 

conld only be met either by overwhelming the country with taxation, 
or by a headlong plunge intO' bankruptcy. 

Hence we can only seriously think of resorting to such a sys- 
tem of land-nationalization on the hypothesis that no purchase need 
be made. This hypothesis is realized in new countries which are 
not yet fully peopled, such as Australia, the United States, some of 
the South American states, and Siberia. In those regions the State 
has granted to colonists, either gratuitously or at a nominal figure, 
the deeds which guarantee property in perpetuity. But the system 
might very well be altered. The State might retain the ownership 
of the land, and only concede temporary possession, which should, 
however, be of sufficient duration to insure the opening-up and 
cultivation of the holdings. This has been done by the Dutch gov- 
ernment in its large colonial possessions. It is the owner of the 
land, but it does not sell its estates, merely conceding them for periods 
of seventy-five years. 



E. THE LAND TAX IN ENGLAND. 

324. Taxes on Land Values. 

1. There shall be charged, levied, and paid on the increment 
value of any land a duty called increment value duty, at the rate 
of one pound for every complete five poimds of that value accruing 
after the thirtieth day of April, 1909, and (a) on the occasion of 
any transfer on sale of the fee simple of the land, or of any inter- 
est in the land; (b) on the occasion of the death of any person 
dying after the commencement of this Act, where the fee simple 
of the land, or of any interest in the land, is comprised in the prop- 
erty passing on the death of the deceased, and (c) where the fee 
simple of the land or of any interest in the land is held by any body 
corporate or unincorporate in such manner that it is not subject 
to death duties. 

2. For the purposes of this Act the increment value of any 
land shall be deemed to be the amount by which the site value of 
the land, on the occasion on which increment value duty is to be 
collected, exceeds the original site value of the land as ascertained 
in accordance with the general provisions of this act as to valua- 
tion. 

7. Increment value duty shall not be charged in respect of 
agricultural land while that land has no higher value than its value 
for agricultural purposes only. Provided that any value for sporting 



PROJECTS OF SOCIAL REFORM 567 

purposes or for other purposes shall be treated as value for agri- 
cultural purposes only, except where the value for such purposes 
exceeds the agricultural value of the land. 

8. Increment value duty shall not be charged on the increment 
value of any land being the site of a dwelling house, where the 
house had been used for twelve months previously by the owner 
thereof as his residence. Increment value duty shall not be charged 
on the increment value of any agricultural land where the land had 
been for twelve months previously occupied and cultivated by the 
owner thereof, and the total amount of land belonging tO' the same 
owner does not exceed fifty acres. 

16. There shall be charged, levied, and paid for every financial 
year in respect to the site value of undeveloped land a duty, called 
the undeveloped land duty, at the rate of one half penny for every 
twenty shillings of the site value. Land shall be deenied to- be un- 
developed if it has not been developed by the erection of dwelling 
houses or of buildings for the purposes of any business, trade, or 
industr}'. For the purposes of undeveloped land dut}^, undeveloped 
land does not include the minerals. 

20. There shall be charged, levied, and paid for the current 
and every subsequent financial year on the rental value of all rights 
to work minerals a duty at a rate in each case of one shilling for 
every twenty shillings of the rental value. 

26. The Commissioners shall, as soon as may be, after the pass- 
ing of this act, cause a valuation tO' be made of the value of all 
land in the United Kingdom, showing separately the title value and 
the site value respectively of the land, and in the case of agricultural 
land the value of the land for agricultural purposes where the value 
is different from the site value. 

28. For the purpose of obtaining a periodical valuation of un- 
developed lands the Commissioners shall, in the year 1914, and 
every subsequent fifth year, cause a valuation to be made of un- 
developed land. 

325. The Land Taxes. 

BY DAVID LLOYD GE^ORGE. 

Now I come to the question of land. The first conviction that 
is borne in upon the Chancellor of the Exchequer is this : that in 
order to do justice he must draw a broad distinction between land 
whose value is purely agricultural and land which has a special 
value attached to it owing either to the fact of its covering market- 
able mineral deposits or because of its proximity to any concentra- 
tion of people. Agricultural land has not, during the past 20 or 



568 READINGS IN ECONOMIC PROBLEMS 

30 years, appreciated in value in this country. In some parts it 
has probably gone down. But there has been an enormous increase 
in the value of urban land and mineral property. The growth in 
the value, more especially of urban sites, is due to no expenditure 
of capital or thought on the part oi the ground owner, but entirely 
owing to the energy and enterprise of the community. It is un- 
doubtedly one of the worst features of our present system that in- 
stead of reaping the benefit of the common endeavor of its citizens 
a community has always to pay a heavy penalt}^ to- its ground land- 
lords for putting up the value of their land. A considerable pro- 
portion of the receipts of rural landlords are put back into the land 
in the shape of fructifying improvements. Uiiban landlords recog- . 
nize no obligation of this kind, nor, do mineral royalty owners. In 
their case rent is a net rent free from liabilities. Still worse, the 
urban landowner is freed from the ordinary social obligations which 
are acknowledged by every agricultural landowner towards those 
whose labor makes their wealth. 

There is no doubt that the spirit of greed is unconsciously much 
more dominant and unrestrained in the case of urban landlords. 
One disastrous consequence of this is that land which is essential 
to the free and healthy development of towns is being kept out of 
the market in order to enhance its value, and that towns are cramped 
and their people become overcrowded in dwellings which are costly 
without being comfortable. The same observations apply tO' the 
case of mineral royalties. There all expenditure is incurred by the 
capitalist, \v\\o runs the risk of losing his capital, and the miner, 
who runs the risk of losing his life. The mine-owner, who runs a 
risk of no kind, should share in the tax burden. 

My present proposals are both for taxation and valuation. Al- 
though very moderate in character, they will produce an apprecia- 
ble revenue in the present year and more in future years. The pro- 
posals are three in number: First, it is proposed to levy a tax on 
the increment of value accruing to- land from' the enterprise of the 
community or the landowner's neighbors. We do not propose to 
make this tax retroactive. It is to apply to future appreciation in 
value only, and will not touch any increment already accrued. We 
begin, therefore, with a valuation of all land at the price which it 
may be expected tO' realize at the present time, and we propose to 
change the duty only upon the additional value which the land may 
hereafter acquire. 

The second proposal relating to land is the imposition of a tax 
on the capital value of all land which is not used to the best ad- 
vantage. The owner of valuable land which is likely in the near 



PROJECTS OF SOCIAL REFORM 569 

future tO' be required for building purposes, who contents himself 
with an income wholly incommensurate with the capital value of 
the land with the hope of recouping himself ultimately in increased 
prices, is in a similar position to the investor who re-invests the 
greater part of his dividends. But while the latter is obliged to pay 
income taxes even on the latter, the former escapes taxation upon 
his accumulated capital altogether. We propose to redress this an- 
omioly by charging an annual duty of ^^d. in the £. 

My third proposal under the head of land is a 10% reversion 
duty upon any benefit accruing to a lessor from the determination 
of the lease, the value of the benefit to be taken to^ be the amount 
by which the total value of the land at the time the lease falls in 
exceeds the value of the consideration for the grant of the lease. 
The reversion at the end of a long building lease having no appre- 
ciable market value at the time the lease is granted is, when the 
lease falls in, in the nature of a windfall, and can be made to bear 
a reasonable tax without hardship. 

These proposals necessarily involve a complete reconstruction of 
the method of valuing property. The existing taxes are levied upon 
the annual value of property as a whole without distinguishing be- 
tween the value which resides in the land, and that which has been 
added by the owner in improvements. The methods of valuation 
vary in difi^erent localities, with the result that the incidence is very 
uneven. It now becomes necessary to distinguish between the two 
elements in the value of real property, while a complete register of 
the owners and other persons interested in land, with full details of 
the various interests, will ultimately be required. 



F. THE SOCIALIST'S INDICTMENT OF CAPITALISM. 
326. Marx's Theory of the Development of Capitalism. 

BY WERNER SOMBART. 

Marx held a particular view concerning the period of history in 
which we are now living, that is to say, concerning the age of Cap- 
italism, and this view tried to show the justification for the socialist 
movement. He showed it in two ways. In the first place, he at- 
tempted to prove that the present capitalist system, by virtue of its 
inherent qualities, contained within itself the germs of its own de- 
cay ; and, in the second place, that as the capitahst system decays it 
creates the necessary conditions for the birth of socialist society. 



570 READINGS IN ECONOMIC PROBLEMS 

These ideas may be thus expressed. The capitalist system, in its 
onward flow, develops p'henomena which prevent the smooth work- 
ing of the great producing machine. On the one hand we have in- 
creasing socialization of production — the tendency for production 
to be more and more on a large scale ; for big businesses to swallow 
up smaller ones — and the increasing intensity in production. On 
the other hand, the direction of production and its distribution are 
still in private hands — in those of the capitalist undertaker. 

These tendencies come into more serious opposition as time goes 
on, and the result is that commercial crises, that disease to which 
capitalist organization, oi industry is so liable, appear periodically, 
and with more and more disastrous results. "Not only are many 
of the commodities already produced wholly destroyed in these 
crises, but a good many of the instruments of production are sub- 
ject tO' a similar fate. In these crises a social epidemic breaks out 
such as in all earlier ages would have been accounted madness — 
the epidemic of overproduction. Society finds itself for the time 
being in a state of barbarism; it is as though a famine or a general 
war of extermination had cut off all supplies of the necessaries of 
life. Industry and commerce seem to- be destroyed." 

The inner conflict in the capitalist organization of society is re- 
flected in the growing opposition between the two- classes on which 
that organization rests — between the bourgeoisie and the prole- 
tariat. 

The bourgeois class, owing to the "centralization O'f capital," is 
represented by a constantly decreasing number of capitalists, and 
the proletariat by a constantly increasing mass of impoverished in- 
dividuals who sink deeper and deeper in misery. "The modern 
worker instead of rising with the advance of industry, sinks deeper 
and deeper because of the conditions which his own class imposes 
upon him. The worker becomes a pauper, and pauperism develops 
even more quickly than population or wealth. This makes it abun- 
dantl}^ clear that the bourgeoisie is incapable of remaining the ruling 
class in society, and of forcing society to- accept the conditions of 
its existence as a general law regulating the existence of society as 
a whole. The bourgeoisie is incapable of bearing rule because it is 
unable to ensure for its slaves a bare existence, because it is forced 
to place them in a position where, instead of maintaining society, 
society must maintain them." It is the misery here mentioned that 
produces rebellion ; the proletariat rises against the ruling class. 
And it is able to do this because it has been "trained, united and 
organized" by "the very mechanism of the process of capitalist pro- 



PROJECTS OF SOCIAL REFORM 571 

duction." "The hour of capitahst property has struck. Those who 
have expropriated others are now themselves expropriated." 
"Society will openly and directly take possession oi the means of 
production" and the difficulties inherent in the capitalistic system 
will be removed. To take hold oi power .in this way, and so to in- 
troduce a new economic organization, will be possible because all 
the necessary conditions will have been created by the capitalist or- 
ganization — "constantly increasing co-operation in labour, applica- 
tion of technical knowledge, the derivation of the maximum produce 
from the soil, the transfomiation of the instruments of labour into 
such as may be used in common by many workers, the inclusion 
of all peoples in the net of the world market." 

This broad theory of evolution comprises a number of single 
theories. 

(i) The Theory of Concentration was adopted by Marx from 
Louis Blanc. Marx enlarged and illustrated it in a most brilliant 
fashion. The theory lays it down that under the pressure of the 
competition inherent in the capitalist system, capitalist undertaking 
completely drives out the methods of production which existed in 
pre-capitalistic times ; it swallows up the small, independent produc- 
ers ; and then "one capitalist destroys many," or "many capitalisis 
are expropriated by a few," i. e., undertakings on a large scale pre- 
vail more and more, and economic development tends tO' bring about 
a state of things where everything is controlled from one centre. 

(2) The Theory of Socialization is closely connected with that 
of concentration. It asserts that capitalist development will event- 
ually produce all the conditions necessary for bringing about a so- 
cialist, or communist, order oi economic life. In other words, the 
theory holds that the elements of the coniiing economic systemi are 
maturing within the frame-work of Capitalism. This theory, which 
is clearly of extreme importance for the foundation of the realistic 
standpoint, is of all the teachings of Marx and Engels most char- 
acteristically theirs. Separating its component parts, it may be de- 
scribed as follows : 

By utilizing improved processes in production in the capitalist 
organization of industry, it is possible to increase the productivity 
of the labour of society, and thus develop' the productive powers of 
society. In this way, "by a wise distribution of work, there is a 
possibility — for the first time in the history of mankind — not only 
of producing sufficient for the necessary subsistence of all the mem- 
bers of society and for setting aside a reserve, but also of giving 
each one sufficient leisure, so that what is of value in culture, sci- 



572 READINGS IN ECONOMIC PROBLEMS 

ence, art, social intercourse and so forth, may continue, and be 
turned from being a monopoly of the ruling class intO' the common 
possession of the whole of society. This is the important point. 
For as soon as the productive power of human labour has developed 
thus far, there is no longer any reason for the existence of a ruling 
class. 

(3) The Theory of Accumulation lays it down that the number 
O'f great capitalists is on the decrease. 

(4) The Theory of Pauperization asserts that the intellectual 
and material condition of the proletariat under the capitalist system, 
instead of improving, grows constantly worse and worse. 

(5) The Theory of Self-Destruction asserts that Capitalism is 
digging its own grave. The occurrence of commercial crises, com- 
ing as they do with constantly increasing force, proves conclusively 
the failure of the prevailing economic system to maintain its pre- 
dominance. The crises are the symptoms of the bankruptcy of the 
existing social order ; and one day they will become so extensive 
that recovery will become quite impossible. 

337. The Economic Failure of Capitalism. 

BY J. RAMSKY MACDONAI^D. 

Commercialism is a phase in the evoilution of industrial organ- 
isation, and is not its final form. It arose when nations were suffi- 
ciently established to make national and international markets pos- 
sible, and it created classes and interests which separated them- 
selves from the rest of the community and which proceeded to but- 
tress themselves behind economic monopolies, social privileges, polit- 
ical power. The new industrial regime supplanted feudalism when the 
historical work of feudalism was done and it had ceased to be useful, 
and proceeded to build up a method of wealth production and distri- 
bution regulated by nothing but the desire for individual success and 
private gain. The new power lost sight of social responsibilities and 
social coherence. The interests of the individual capitalist, of the 
class of capitalists, of the property owners, were put first, and those 
of the community as a whole were subordinated. It was hoped, 
that by the individual capitalist pursuing his own interest national 
well-being would be served. The error soon reaped its harvest of 
misery, when women and children were dragged into the factories 
late in the eighteenth and early in the nineteenth centuries, when 
people were gathered into foul industrial towns, and when only 
human endurance limited the length of the working day. So sep- 



PROJECTS OP SOCLIL RBPORM 



573 



arate had become the interests of the nation from those of the prop^ 
ertied classes that the latter foimd profit from the degradation and 
deterioration of the population. It mattered not to the cotton own- 
er of Lancashire a hmidred years ago what became of the children 
who were working in his factories, or later on, what became of the 
women who took their places. When one "hand" died another 
"hand'" was ready to step into his place, and whether his life was 
long or short, sad or merry, the machines which he tended spun out 
their enormous profits, and the owner saw no reason to believe that 
the day of his prosperity was short. 

The system certainly solved the problem of production. Under 
its whips and in search of its prizes, mechanical invention proceeded 
apace^ labour was organised and its efficiency multiplied ten, twenty, 
an hundred fold. Statistics in proof of this live with the wonder 
that rs in them. That twenty men in Lancashire to-day can make 
as much cotton as the whole of the old cotton-producing Lancashire 
put together; that i,ooo shoe operatives in Leicester can supply a 
quarter of a million people with four pairs of boots a year ; that 
120 men in a mill can grind enough flour to keep 200,000 people's 
wants fully supplied, seem to come from the pages of romance 
rather than from the sober history of industry. Commercialism has 
written those pages, and they are its permanent contribution to 
human well-being. 

As time went on, however, it was seen that this wonderful sys-' 
tem of production was tjuite unable to devise any mechanism' of 
distribution which could relate rewards to deserts. Distribution was 
left to the stress and uncertainty of competition and the struggle 
of economic advantages. The law of the survival of the fittest was 
allowed to have absolute sway, under circumstances which deprived 
it of moral value. The result was that national wealth was heaped 
up at one end over a comparatively small number of people and 
lay thinned out at the other end over great masses of the population. 
At one end people had too much and could not spend it profitably, 
at the other end they had too little and never gained that mastery 
of things which is preliminary to well-ordered life. Moreover, even 
many of those who possessed held their property on such precarious 
tenure that possession gave them little security and peace of mind. 
Prosperity was intermittent both for capital and labour. 

Then conscious effort to rectify the chaos began to show itself. 
The national will protected the national interests through factory 
and labour legislation, and at the same time the chaos within the 
system was being modified by the life of the system^ itself. Com- 



574 READINGS IN ECONOMIC PROBLEMS 

petition worked itself out in certain directions, and cooperation in 
the form of trusts came to take its place, as nature turns to hide 
up the traces of war in a country that has been fought over. This 
new organization is more economical and may steady to some ex- 
tent the demand for labour ; but it means that economic power is 
being placed in the hands of a few. That is too dangerous in the 
eyes of the Socialist. Its operation is too uncertain. From his very 
nature the monopolist is an exploiter. He grasps the sceptre of 
state, as well as the sceptre of industry. He sits in Parliament as 
well as in the counting-house. He becomes a powerful citizen as 
well as a masterful captain of industry. He raises in a most acute 
form the problem of how the community can protect itself against 
interests being created round its exploitation and enslavement. Com- 
petition solves its own problems and leaves those of monopoly in 
their place. 

Surveying the same field with an eye on the moral fruits which 
it has borne, the Socialist once more discovers Aveeds in plenty. 
The familiar methods of adulteration and of all forms of sharp 
dealing, both with work-people and with customers, pass before his 
eyes in disquieting masses. Honesty on this field is not the best 
policy. Materialist motives predominate. Birth and honour bow 
to wealth. Wealth can do' anything in "good" society to-day — even 
to the purchase of wives as in a slave market. A person may be 
vulgar, may be uncultured, may be coarse and altogether unpleas- 
ing in mind and manner but, if he has mioiiey, the doors of honour 
are thrown open to him, the places of honour are reserved for his 
occupation. The struggle for life carried on under the conditions 
of commercialism means the survival of sharp wits and acquisitive 
qualities. The pushful energy which brings ledger successes sur- 
vives as the "fittest" under commercialismi. Capitalism has created 
a rough and illworking mechanism of industry and a low standard 
of value based upon nothing but industrial considerations, and it has 
done its best to hand over both public and private values to be 
measured by this standard and to be produced by this mechanism. 

But the controlling influences which have been brought to bear 
upon it — both those of a political character from without and those 
of an industrial character from within — are the foreshadowings 
oif a new system of organization. Commercialism lays its own 
cuckoo &gg in its nest. Every epoch produces the thought and the 
ideals which end itself. Like a dissolving view on a screen, com- 
mercialism fades away and the image of Socialism comes out in 
clearer outline. 



PROJECTS OF SOCIAL REFORM 575 

G. THE MEANING OE SOCIALISM. 
328. The Central Aim of Socialism. 

BY THOMAS KIRKUP. 

The central aim of socialism is to terminate the divorce of the 
workers from the natural sources of subsistence and of culture. 
The socialist theory is based on the historical assertion that the 
course of social evolution for centuries has gradually been to ex- 
clude the producing classes from the possession of land and capital, 
and to establish a new subjection, the subjection of workers who 
have nothing to depend on but precarious wage-labour. Socialists 
maintain that the present system leads inevitably to social and 
economic anarchy, to the degradation of the working man and his 
family, to the growth of vice and idleness among the wealthy classes 
and their dependants, to bad and inartistic workmanship, to inse- 
curity, waste, and starvation ; and that it is tending more and more 
to separate society into two classes, wealthy millionaires confronted 
with an enormous mass of proletarians, the issue out of which must 
either be socialism or social ruin. To avoid all these evils and to 
secure a more equitable distribution of the means and appliances 
of happiness, socialists propose that land and capital, which are the 
requisites of labour and the sources of all wealth and culture, should 
be placed under social ownership and control. 

In thus maintaining that society should assume the management 
of industry and secure an equitable distribution of its fruits, social- 
ists are agreed ; but on the most important points of details they 
differ very greatly. They differ as to^ the form society will take 
in carrying out the socialist programme, as to the relation of local 
bodies to the central government, and whether there is to be any 
central government, or any government at all in the ordinary sense 
of the word, as to the influence of the national idea in the society 
of the future, etc. They differ also as tO' what should be regarded 
as an 'equitable' system^ of distribution. 

Still, it should be insisted that the basis of socialism is economic, 
involving a fundamental change in the relation of labour to land and 
capital— a change which will largely aft'ect production, and will en- 
tirely revolutionize the existing system of distribution. But, while 
its basis is economic, socialism implies and carries with it a change in 
the political, ethical, technical and artistic arrangements and insti- 
tutions of society, which would constitute a revolution greater than 
has ever taken place in human history, greater than the transition 



576 READINGS IN ECONOMIC PROBLEMS 

from the ancient to the mediaeval world, or from the latter to the 
existing order of society. 

In the first place, such a change generally assumes as its political 
complement the most thoroughly democratic organization of society. 
Socialism, in fact, claims to be the economic complement of democ- 
racy, maintaining that without a fundamental economic change polit- 
ical privilege has neitlier meaning nor value. 

In the second place, socialism naturally goes with an unselfish 
or altruistic system oi ethics. The most characteristic feature of 
the old societies was the exploitation of the weak by the strong 
under the systems of slavery, serfdom, and wage-labour. Under the 
socialistic regime it is the privilege and duty of the strong and 
talented tO' use their superior force and richer endowments in the 
service of their fellow-men without distinction of class, or nation, or 
creed. In the third place, socialists maintain that, under their sys- 
tem and nO' other, can the highest excellence and Ibeauty be re- 
alized in industrial production and in art ; whereas under the present 
system beauty and thoroughness are alike sacrificed to cheapness, 
which is a necessity oi successful competition. 

Lastly, the socialists refuse to admit that individual happiness 
or freedom or character would be sacrificed under the social ar- 
rangements they propose. They believe that under the present sys- 
tem a free and harmonious development of individual capacity and 
happiness is possible only for the privileged minority, and that 
socialism alone can open up a fair opportunity for all. They be- 
lieve, in short, that there is no opposition whatever between social- 
ism and individuality rightly understood, that these two are com- 
plements the one of the other, that in socialism alone may every 
individual have hope of free development and a full realization of 
himself. 

329. The Distinction between Socialism and Communism. 

BY M. TUGAN-BARANOWSKY. 

The distinction between Socialism and Comimunism is co-mmonly 
thought to lie in that Socialism demands only that the means of pro- 
duction be transferred to the community, admitting private prop- 
erty in objects of use, whilst Communism claims complete abolish- 
ment of private property. But this is not quite correct. In the first 
place it is not possible to draw exact boimdaries between means of 
production and objects of use. Nor is it correct to maintain that 
Socialism demands the socialization of all implements of work, or 
means of production. Most socialists assign to every family, a 



PROJECTS OF SOCIAL REFORM 577 

separate house, involving individual possession of means of pro- 
duction, for instance, utensils, tableware and books not read for a 
pastime. Even under Socialisni certain instruments of production 
retain the cjuality of private property. 

But there are a great many objects the private possessions of 
which collectivist society can by no means grant. Many things serv- 
ing for immediate use and enjoyment, museums, gardens, etc., al- 
ready form objects of public property. Under a socialistic arrange- 
ment this class will be considerably expanded. In such a social state 
there will be three classes of objects of use: one belonging to the 
community as such, to the use of which all shall have free access ; 
one likewise social property, the individual use of which shall be 
granted for a certain compensation; and one shall consist of objects 
possessed by individuals as private property. 

But even commiunism does not include the complete disappear- 
ance of property. The organization of social production, to what- 
ever extent it ma}^ develop, will find on its way, many an object 
of use, which owing tO' its very nature must be left in individual 
possession, for instance clothing. However broadly the principle of 
Communism may be carried out, it will never succeed in dressing two 
individuals in one coat at one and the same time, and every coat 
must therefore practically be the property of him who wears it. 

The principle distinction between Socialism, and Communism 
cannot, therefore, lie in the criterion referred to. In view of this 
fact many are inclined to identify the two. It is, however, not im- 
possible to mark out the point of difference between these systems. 
Amongst collectivist systems it is easy tO' discern two fundamental 
types. According to one the individual income is adjusted by de- 
termining the sum total the individual may dispose of to satisfy his 
wants. xAccording to the other the very notion of income as a 
determined value is rejected, the immediate wants only being regu- 
lated or recognized as aibsolutely free. Under the order of the first 
t}'pe the distribution of products proceeds by means of a money 
system, were it but an ideal one ; every individual spends his in- 
come : everything must have its price. In other words, money as a 
standard of value and purchasing power represents an indispensable 
organ of distribution ; whereas in the organization of the second 
type, in which illimited freedom; of consumption is admitted, and 
not the income, but the use it is put to^ is being controlled, money 
as an instrument of distribution is not at all necessary. Social 
economy of the first type supposes the use oi money, while that of 
the second type has no use for money at all. 



578 READINGS IN ECONOMIC PROBLEMS 

330. Centralized Socialism. 

BY M. TUGAN-BARANOWSKY. 

The centralized socialism represents the reigning tendency of 
the socialistic movement oi the present time. Under the rule of 
unlimited competition which prevails at the present time, there is 
no social guidance of economic life, and individuals act without con- 
certed plan. The highest aim mankind is striving to attain is to in- 
stitute an universal association of the working classes. The ground- 
work of an effective organization consists, according to- St. Simon's 
disciples in the following measures : 

All instruments of production shall be concentrated in the hands 
of the state. The disposition of these instruments, and their distri- 
bution among the simdry localities of the country, belong to the 
functions of the Central State Administration, which shall be in- 
vested with the power of authority. 

In immediate connection with the Central Office .stand the Pro- 
vincial Boards, which branching out into territorially still more con- 
fined institutions, come more and more into* closer contact with 
single producers and consumers, and together constitute an heir- 
archy of economic organizations with the Central State Administra- 
tion at its head. The local organizations will provide the Central 
Office with information concerning the magnitude and character 
of the national demand, according to which the Central Office will 
distribute to- them the instruments of production, after having com- 
pared the local demands with one another and the means of pro- 
duction at the disposal of the nation. Every year a national budget 
will be set up, in which the assets will be represented by the sum 
total of the national products, and the expenditure by the demands 
on the part of the local organizations, each of which will have to 
establish its own budget on the same principle. In their opinion 
this must result in a harmonious arrangement of the entire economic 
activity, and in the complete correspondence of national production 
to national consumption. 

The Union of the Laborers will form an hierarchical arrange- 
ment in which there will be superior and inferior officials, fore- 
men and subordinates. The principle of distribution will be : "from; 
each according to his capacities, to each according to his work." 
Thus there will be a strict proportionality between what each mem- 
ber gives to, and receives fromi, society. The St. Simonians assert 
that this reward according to merit is the expression of true equal- 
ity. 



PROJECTS OF SOCIAL REFORM 579 

H. THE PROGRAM OF SOCIALISM. 

331. The Program o£ the SociaHstic Workingman's Party in 

Germany. 

I. Labour is the source of all wealth and all culture, and as use- 
ful work in general is possible only through society, so to society, 
that is to all its members, the entire product belongs ; while as the 
obligation to labour is universal, all have an equal right to- such pro- 
duct, each one according to his reasonable needs. 

In the existing society the instruments of labour are a monopoly 
of the capitalist class ; the subjection of the working class thus aris- 
ing is the cause of misery and servitude in every form. 

The emancipation of the working class demands the transfor- 
mation of the instruments of labour into the common property of 
society and the co-operative control of the total labour, with appli- 
cation of the product of labour to the com,mon good and just dis- 
tribution of the same. The emancipation, of labour must be the 
w^ork of the labouring class, in contrast to which all other classes 
are only a reactionary mass. 

II. Proceeding from these principles, the socialistic working 
men's party of Germany aims by all legal means at the establish- 
ment of the free state and the specialistic society, to destroy the 
Iron Law of Wages by abolishing the system of wage-labour, to 
put an end to exploitation in every form, to remove all social and 
political inequality. 

The socialistic working men's party of Germany, though acting 
first of all within the national limits, is conscious of the international 
character of the labour movement ; and resolved to fulfill all the 
duties which this imposes on the workmen, in order tO' realize the 
universal brotherhood of man. 

332. The Basis of the Fabian Society. 

The Fabian Society consists of socialists. 

It therefore aims at the reorganization of society by the emanci- 
pation of Land and Industrial Capital from individual and class 
ownership, and the vesting of them in the community for the gen- 
eral benefit. In this way only can the natural and acquired ad- 
vantages of the country be equitably shared by the whole people. 

The Society accordingly works for the extinction of private 
property in land and of the consequent individual appropriation, in 
the form of rent, of the price paid for permission to use the earth, 
as well as for the advantages of superior soils and sites. 



58o READINGS IN ECONOMIC PROBI^EMS 

The Society, further, works for the transfer to the community 
of the administration of such industrial capital as can conveniently 
be managed socially. For, owing to the monopoly of the means of 
production in the past, industrial inventions and the transformation 
of surplus income into capital have mainly enriched the proprietary 
class, the worker being now dependent on that class for leave to 
earn a living. 

If these measures be carried out, without compensation (though 
not without such relief to expropriated individuals as may seem fit 
to the community), rent and interest will be added to^ the reward 
of labour, the idle class now living on the labour of others will 
necessarily disappear, and practical ecjuality of opportunity will be 
maintained by the spontaneous action of economic forces with, much 
less interference with personal liberty than the present system en- 
tails. 

For the attainment of these ends the Fabian Society looks to 
the spread of socialist opinions, and the social and political changes 
consequent thereon, including the establishment of equal citizenship 
for men and women. It seeks tO' promote these by the general dis- 
semination of knowledge as to the relation between the individual 
and society in its economic, ethical and political aspects. 

333. Platform of the Socialist Party of the United States.* 

The Socialist Party of the United States declares that the cap- 
italist system has outgrown its historican function, and has become 
utterly incapable of meeting the problems now confronting society. 
We denounce this outgrown system as incompetent and corrupt and 
the source of unspeakable misery and suffering to the whole work- 
ing class. 

Under this system the industrial equipment of the nation has 
passed into the absolute control of a plutocracy which exacts an 
annual tribute of millions of dollars from the producers. Unafraid 
of any organized resistance, it stretches out its greedy hands over 
the still undevloped resources of the nation — the land, the mines, 
the forests and the water-powers of ever}' State in the Union. 

In spite of the multiplication of labor-saving machines and im- 
proved methods in industr}'- which cheapen the cost of production, 
the share of the producers grows ever less, and the prices of all 
the necessities of life steadily increase. The boasted prosperity of 
this nation is for the owning class alone. To the rest it means 

* Adopted at Indianapolis, Ma}-, 1912. 



PROJECTS OF SOCIAL REFORM 581 

only greater hardship and misery. The high cost of living is felt 
in every home. Millions of wage-workers have seen the purchasing 
power of their wages decrease until life has become a desperate 
battle for mere existence. 

Multitudes of unemployed walk the streets of our cities or 
trudge from State to State awaiting the will of the masters to move 
the wheels of industry. 

The farmers in every State are plundered by the increasing 
prices exacted for tools and machinery and by extortionate rents, 
freight rates, and storage charges. 

Capitalist concentration is mercilessly crushing the class of small 
business men and driving its members into the ranks of propertiless 
wage-workers. The overwhelming majority of the people of Am- 
erica are being forced under a yoke of bondage by this soulless in- 
dustrial despotism. 

It is this capitalist system that is responsible for the increasing 
burden of armaments, the poverty, slums, child labor, most of the in- 
sanity, crime, and prostitution, and much of the disease that afflicts 
mankind. 

Under this system the working class is exposed to poisonous con- 
ditions, to frightful and needless perils to life and limb, is walled 
around with court decisions, injunctions and unjust laws, and is 
preyed upon incessantly for the benefit of the controlling oligarchy 
of wealth. Under it also, the children of the working class are 
doomed to ignorance, drudging toil and darkened lives. 

In the face of these evils, so manifest that all thoughtful observ- 
ers are appalled at them, the legislative representatives of the Re- 
publican, Democratic, and all reform parties remain the faithful 
servants of the oppressors. Pleasures designed to secure to the wage 
earners of this nation as humane and just treatment as is already 
enjoyed by the wage-earners of all other civilized nations have been 
smothered in committee without debate, and laws ostensibly designed 
to bring relief to the farmers and general consumers are juggled 
and transformed into instruments for the exaction of further tribute. 
The growing unrest under oppression has driven these two old 
parties to the enactment of a variety of regulative measures, none 
of which has limited in any appreciable degree the power of the 
plutocracy, and some of which have been perverted into means for 
increasing that power. x\nti-trust laws, railroad restrictions and 
regulations, with the prosecutions, indictments and investigations 
based upon such legislation, have proved to be utterly futile and 
ridiculous. Nor has this plutocracy been seriously restrained or 
even threatened by any Republican or Democratic executive. It has 



582 READINGS IN ECONOMIC PROBLEMS 

continued to grow in power and insolence alike under the admin- 
istrations of Cleveland, McKinley, Roosevelt and Taft. 

In addition to this legislative juggling and this executive con- 
nivance, the courts of America have sanctioned and strengthened 
the hold of this plutocracy as the Dred Scott and other decisions 
strengthened the slave power before the Civil War. 

We declare, therefore, that the longer sufferance of these con- 
ditions is impossible, and we purpose to end them all. We declare 
them to be the product of the present system in w^hich industry 
is carried on for private greed, instead of for the welfare of society. 
We declare, furthermore, that for these evils there will be and can he 
no remedy and no substantial relief except through Socialism, under 
which industry will be carried on for the common good and every 
worker receive the full social value of the wealth he creates. 

Society is divided into warring groups and classes, based upon 
material interest. Fundamentally, this struggle is a conflict between 
the two main classes, one of which, the capitalist class, owns the 
means of production, and the other, the working class, must use 
these means of production on terms dictated by the owners. 

The capitalist class, though few in numbers, absolutely controls 
the Government — legislative, executive and judicial. This class 
owns the machinery of gathering and disseminating news throingh 
its organized press. It subsidizes seats of learning — the colleges 
and schools — and even religious and moral agencies. It has also 
the added prestige which established customs give to any order of 
society, right or wrong. 

The working class, which includes all those who are forced to 
work for a living, whether by hand or by brain, in shop, mine or 
on the soil, vastly outnumbers the capitalist class. Lacking effec- 
tive organization and class solidarity, this class is unable to enforce 
its will. Given such class solidarity and effective organization, the 
workers will have the power to make all laws and control all in- 
dustry in their own interest. 

All political parties are the expression of economic class inter- 
ests. All other parties than the SociaHst Party represent one or an- 
other group of the ruling capitalist class. Their political conflicts 
reflect merely superficial rivalries between competing capitalist 
groups. However they result, these conflicts have no issue of real 
value to the workers. Whether the Democrats or Republicans win 
politically, it is the capitalist class that is victorious economically. 

The Socialist Party is the political expression of the economic 
interests of the workers. Its defeats have been their defeats, and 
its victories their victories. It is a party founded on the science and 



PROJECTS OP SOCIAL REPORM 583 

laws of social development. It proposes that, since all social neces- 
sities today are socially produced, the means of their production 
shall be socially owned and democratically controlled. 

In the face of the economic and political aggressions of the cap- 
italist class the only reliance left the workers is that of their eco- 
nomic organizations and their political power. By the intelligent 
and . class-conscious use of these they may resist successfully the 
capitalist class, break the fetters of wage slavery, and fit themselves 
for the future society, which is to displace the capitalist system. The 
Socialist Party appreciates the full significance of class organization 
and urges the wage earners, the working farmers and all other 
useful workers everywhere to* organize for economic and political 
action, and we pledge ourselves to support the toilers of the fields 
as well as those in the shops, factories and mines of the nation in 
their struggle for economic justice. 

In the defeat or victory of the working class party in this new 
struggle for freedom lies the defeat or triumph of the common 
people of all economic groups, as well as the failure or the triumph 
of popular government. Thus the Socialist Party is the party of the 
present day revolution, which marks the transition from economic 
individualism tO' Socialism, from wage slavery to free co-operation, 
from capitalist oligarchy to industrial democracy. 

As measures calculated to strengthen the working class in its 
fight for the realization of its ultimate aim, the Co-operative Com- 
monwealth, and to increase the power of resistance against cap- 
italist oppression, we advocate and pledge ourselves and onr elected 
officers to the following program : 

COLLECTIVE OWNERSHIP. 

I. The collective ownership and democratic management of 
railroads, wire and wireless telegraphs and telephones, express ser- 
vices, steamboat lines and all other social means of transportation 
and communication and of all large scale industries. 

2. The immediate acquirement by the municipalities, the States 
or the federal government of all grain elevators, stockyards, storage 
warehouses and other distributing agencies, in order to reduce the 
present extortionate cost of living. 

3. The extension of the public domain to include mines, quar- 
ries, oil wells, forests and water power. 

4. The further conservation 3,nd development of natural re- 
sources for the use and benefit of all the people : 

(a) By scientific forestration and timber protection. 

(b) By the reclamation of arid and swamp tracts. 



584 READINGS IN ECONOMIC PROBLEMS 

(c) By the storage of flood waters and the utilization of water 
power. 

(d) By the stoppage of the present extravagant waste of the 
soil and of the products of mines and oil wells. 

(e) By the development of highway and waterway systems. 

5. The collective ownership of land wherever practicable, and 
in cases where such ownership is impracticable, the appropriation 
by taxation of the annual rental value of all land held for specu- 
lation. 

6. The collective ownership and democratic management of the 
banking and currency system;. 

une:mployme;nt. 

The immediate government relief of the unemployed by the ex- 
tension of all useful public works. All persons employed on such 
works to be engaged directly by the government under a workday 
of not more than eight hours and not less than the prevailing union 
wages. The government also to establish employmient bureaus ; to 
lend money to States and municipalities without interest for the 
purpose of carrying on public works, and tO' take such other meas- 
ures within its power as will lessen the widespread misery of the 
workers caused by the misrule of the capitalist class. 

INDUSTRIAL DEMANDS. 

The conservation of human resources, particularly of the lives 
and well-being of the workers and their families : 

1. By shortening the workday in keeping with the increased 
productiveness of machinery^ 

2. B}^ securing to every worker a rest period of not less than a 
da}^ and a half in each week. 

3. By securing a more effective inspection of workshops, fac- 
tories and mines. 

4. By forbidding the employment of children under 16 years 
of age. 

5. By the co-operative organization of industries in federal 
penitentiaries and workshops for the benefit of convicts and their 
dependents. 

6. By forbidding the interstate transportation of the products 
of child-labor, of convict labor and of all uninspected factories and 
mines. 

7. By abolishing the profit system in government work, and 
substituting either the direct hire of labor or the awarding of con- 
tracts to co-operative groups of workers. 



PROJECTS OF SOCIAL REFORM 585 

8. By establishing minimium wage scales. 

9. By abolishing official charity and substituting a non-con- 
tributory system of old age pensions, a general system of insurance 
by the State of all its members against unemployment and invalid- 
ism and a system of compulsory insurance by employers of their 
workers, without cost to the latter, against industrial disease, acci- 
dents and death. 

POLlTlCAIv DEMANDS. 

The absolute freedom of press, speech, and assemblage. 

The adoption of a gradual income tax, the increase O'f the rates 
of the present corporation tax and the extension of inheritance taxes, 
graduated in proportion to the value of the estate and to nearness 
of kin — the proceeds of these taxes to be employed in the social- 
ization of industry. 

The abolition of the monopoly ownership of patents and the 
substitution of collective ownership, with direct rewards to inventors 
by premiums or royalties. 

Unrestricted and equal suffrage for men and women. 

The adoption of the initiative, referendum and recall and of 
proportional representation, nationally as well as locally. 

The abolition of the Senate and the veto power of the President. 

The election of the President and" the Vice-President by direct 
vote of the people. 

The abolition of the power usurped by the Supreme Court of the 
United States to pass upon the constitutionality of the legislation 
enacted by Congress. National laws to be repealed only by act of 
Congress or by the voters in a majority of the States. 

The granting of the right of suffrage in the District of Colum- 
bia with representation in Congress and a democratic form of 
municipal government for purely local affairs. 

The extension of democratic government to all United States 
territory. 

The enactment of further measures for general education and 
particularly for vocational education in useful pursuits. The Bureau 
of Education to be made a department. 

The enactment of further measures for the conservation of 
health. The creation of an independent Bureau of Health with such 
restrictions as will secure full liberty for all schools of practice. 

The separation of the present Bureau of Labor from the Depart- 
ment of Commerce and Labor and its elevation to the rank of a de- 
partment. 

Abolition of the Federal District Courts and the United States 
Circuit Courts of Appeals. State courts to have jurisdiction in all 



586 READINGS IN ECONOMIC PROBLEMS 

cases arising between citizens of the several States and foreign 
corporations. The election oi all judges for short terms. 

The immediate curbing of the power of the courts to issue in- 
junctions. 

The free administration of justice. 

The calling of a convention for the revision of the Constitution 
of the United States. 

Such measures of relief as wie may be able to force from cap- 
italism are 'but a preparation of the workers to seize the whole pow- 
ers of government in order that they may thereby lay hold of the 
whole system of socialized industry and thus come tO' their rightful 
inheritance. 

I. SOCIALISM AND NUMBERS. 
334. Socialism and Overpopulation. 

BY W. D. P. BUSS. 

Objection: The biological one that Socialism would lead to 
overpopulation, or if population were restricted, in any way, to race 
deterioration, which (biologists assert) must be the result of the 
limitation of the opportunity of the fittest to crush out the unfit. 

The dangers of over-population need not trouble many. No one 
can travel through even the most crowded countries in the world, 
without seeing that there is room enough for an increase of popu- 
lation of untold millions, if men were not driven by industrial com- 
petition to scramble for a livelihood in great cities. While as for 
the food, the possible food production of the great torrid zones of 
the earth have not begun to> be scientifically developed, and scarcely 
touched. Mr. Edward Atkinson has shown that in the United 
States alone, the food produce could be doubled "by merely bring- 
ing our product up to our average standard of reasonably good 
agriculture.'' While, even as it is, one-fifth of the arable land of 
that country has not yet been touched. Again, it is a'bsolutely 
proven that, whatever be the reason, reproductivity does not keep 
pace with advancing civilization and education. Over-population 
is simply a myth to scare the unthinking with. God's laws may be 
trusted to care for all God's children, provided only that we keep 
God's laws. Take money out of marriage ; and our children shall 
be as arrowiS in the hands of the mighty, and blessed will be the 
man that has his quiver full of them. The real problem of life 
is not how tO' provide for the children that shall be born, but how 
to see to it that children be born right, and to this end improved 



PROJECTS OP SOCL-IL RBPORM 587 

social conditions will contribute largely. Under Socialism we shall 
have none "born tired" and few born diseased. As for the threat- 
ened deterioration of the race through lack of competition, Social- 
ism, in the first place, does not propose tO' abolish competition, only 
to lift it to a higher plane and make it non-industrial, and secondly, 
it is not proven that competition is the only means to progress. 
There are many facts showing how altruism has produced progress ; 
and if healthy environment, fresh air and good food tend to make 
healthy babies, as we think no scientist will deny, it follows at once 
that altruism, and any reform which improves the condition of the 
poor, must improve the race. "Competition is put forth as the law of 
the universe. This is a lie. The time is come to declare it is a lie 
bv work and deed." 



J. SOCIALISM AND INDUSTRIAL INSTITUTIONS. 
335- Voluntary Associations under Socialism. 

BY J. RAMSEY MACDONALD. 

In discussing Socialist administration, the critics of Socialism 
have always overlooked the large part that voluntary organizations 
are to play inside the state. For instance, th^e family will probably 
enjoy an influence which it could not acquire under commercial- 
ism, for under commercialism it has been steadily decaying. The 
relation between parents and children will be closer, and be con- 
tinued for longer periods than is now possible, and consequently 
the home will resume its lost religious significance. It will be altar 
fires that will burn on its hearths, and sacramental meals that will 
lie on its tables. The free man with leisure will show his social 
nature not only by living in crowds, but by forming for his own 
delight groups of men like-minded to himself. One of these volun- 
tary organizations will undoubtedly be a political party, for I can- 
not conceive of a time when different practical proposals in state- 
craft will not exist or not be transformed into great rival policies 
and principles oi government. The state will have to give these 
parties free and fair play, because the state will be democratically 
governed. Each party will have tO' look after its own interest, and 
it will, therefore, be essential that each party have its own organs. 
Under Socialism I can easily imagine that the party newspapers 
would be under party control. The presses might be under party 
management with safeguards, or party rights might consist in a 
power to claim the use of presses. The point is trivial, and if critics 



588 READINGS IN ECONOMIC PROBLEMS 

busy themselves devising- all kinds of possible anomalies and diffi- 
culties, all I can say is that if even today the country decided to 
nationalize its printing presses and to make parties officially re- 
sponsible for the papers published in their interests, two or three 
business men connected v/ith party newspapers could draw up with- 
in a week a scheme of working- which could set the whole plan 
going, and produce a freer and a more responsible press than we 
have now. 

Once we disabuse our minds of the totally erroneous idea that a 
government's interests lie in suppressing every opinion but its own, 
every serious obstacle in the way of free political speech and writing 
under Socialism disappears, and the problem becomes one oi busi- 
ness arrangement. The monopoly of the organs of public opinion, 
which was long supposed to be inevitable under Socialism, is, as a 
matter of fact, inevitable under capitalism, and the fading privilege 
of free discussion will only be restored when economic power is 
better distributed, or, when concentrated, is democraticallv con- 
trolled. For, it must be observed, the suppression of critical oppo- 
sition, impossible so far as a government or public authority is con- 
cerned, is quite possible when a combination of capitalist interests 
makes up its mind to effect it. 

336. Property and Industry under Socialism. 

BY JOHN SPARGO. 

Another phase of our discussion concerns the industrial organ- 
ization of the Socialist State, and the place in it of private industrial 
enterprise. Socialism does not involve the absolute monopolization 
of production and distribution, and the total suppression of private 
initiative and enterprise in these spheres. The economic organiza- 
tion of the Socialist State will undoubtedly include production and 
distribution by individuals and voluntary cooperative groups, as 
well as collective production and distribution under the auspices 
and control of the State itself. 

In all our thought upon this question we must bear in mind that 
the two principal economic arguments for socialization are : First, 
the elimination of economic parasitism, the exploitation of the 
wealth producers by a class of non-producers, and, second, the 
attainment of greater efficiency through the elimination of the 
wastefulness inseparable from capitalist production, especially in its 
competitive stages. 

The first of these reasons constitutes the prime motive of the 
Socialist movement. The second is the raison d'etre of the develop- 



PROJECTS OF SOCIAL REFORM 589 

ment of monopoly. Every thoughtful Socialist recognizes that cap- 
italist production involves an enormous amount of waste, and that 
incalculable gains v^^ould result from' the socialization of industry. 

The greater part of the production and distribution of our pres- 
ent economic system is so organized that the exploitation of the 
workers engaged in it is inevitable. 

It is a fundamental condition of Socialism that all such processes 
and functions be socialized. In other words, it is a sine qua non 
of Socialism that they be so organized as to eliminate profit-making 
b^■ investors. This does not mean that they must all be taken over 
by the supreme political organization which we call the State. Nor 
does it mean that they must all be socialized at once. A few advo- 
cates of Socialism, more zealous than intelligent, seem to believe 
that there will be a grand transformation day upon which all the 
functions of capitalism will be socialized, but that idea is not held by 
thoughtful Socialists. 

Great organizations like the Steel Trust represent the progress 
already made in the direction of Socialism through one channel. 
Measures for the government regulation of monopolies now being 
advocated by conservative non-Socialists indicate an increasing- 
readiness to make progress in the same direction through another 
channel, the channel of political organization. The process of so- 
cialization is essentially an evolutionary one. 

The incentive which operates to bring about the socialization of 
industries conducted for profit obtained from the exploitation of 
the workers, obviously does not exist in the case of petty, individu- 
alistic industries which do not depend upon such exploitation. The 
market gardner who cultivates his own land and sells his produce 
without exploiting the labor of others, and the individual craftsman 
who does all his own work, likewise without exploiting the labor of 
others,, illustrate very clearly the distinctive character of enterprises 
which are not characterized by class exploitation. There is a much 
larger number of these enterprises, both productive and distributive, 
than is generally recognized. It is exceedingly proba'ble that a large 
number of them will continue to exist, as individual enterprises, in 
the Socialist regime. 

It seems probable, then, that in the Socialist State three forms of 
economic enterprise will co-exist, namely ( i ) production and dis- 
tribution on a large scale under the auspices of the government — 
national, state or municipal; (2) productio'U and distribution by co- 
operative associations; (3) production and distribution by private 
individuals. To regulate properly the relation of these three di- 



5go READINGS IN ECONOMIC PROBLEMS 

visions will be the supreme task of the democratic statesmanship of 
the future. 

There are some economic activities which from their very nature 
require > a national organization for their miost efficient direction. 
This is true of railways, telegraphs, postal and express services 
among distributive agencies, and of mining, oil production, and 
steel manufacture among the productive functions. There are other 
economic activities which can be most efficiently directed by the 
smaller unit, the State or Province, and yet others which can be 
most efficiently conducted by the still smaller political unit, the city 
or commune. 

It is impossible to make a rigid classification of the economic 
functions and decide to which political unit each will be entrusted. 
Moreover, were such a classification possible it would not be of 
much value. The Socialist State will inherit the economic organ- 
ization of the capitalist system, and will modify it in the light of 
its experience and according to the needs of its econom:ic develop- 
ment. The economic functions entrusted at first to municipalities 
may later be transferred to- the larger units, the States and prov- 
inces, the citizens choosing a greater degree of centralizatiou in the 
interests of efficiency. On the other hand, a certain amount of de- 
centralization may take place. 

The State, using the term in its most comprehensive sense to 
cover the whole political organization of society, thus assumes the 
functions now performed by the capitalist class in the employment, 
direction and superintendence of labor. Naturally, the relations of 
the State to the individual worker will differ materially from those 
which now exist between employer and employe. The position of 
the worker will be somewhat analogous tO' that of the employe who 
is also a shareholder in the concern for which .he works. Misunder- 
standings and conflicts between them are, therefore, not only pos- 
sible but highly probable — ^perhaps inevitable. 

Inseparable from such a system would be the danger of conflict 
between the decisions of the workers engaged in important branches 
of the industrial organization and the interests of the people as a 
whole. 

It is very evident therefore, that some way must be found to base 
the industrial organization of the Socialist State upon the dual basis 
of the interests of the whole- citizenry on the one hand, and the 
special interests of the workers as such upon the other hand. One 
Socialist writer has gravely proposed the establishment of an elec- 
tive "industrial parliament of two chambers, in one of which repre- 



PROJECTS OP S0CL4L REPOKM 591 

sentation will be according- to numbers, while in the other every 
industry will be represented irrespective of size." 

One weakness is common to all such ingenious devices. They 
are all essentially Utopian. Based upon abstract principles, they fail 
to take into account the important fact that society is an organism 
subject to the laws of evolution. Social institutions are never the 
result of the deliberate adoption of clever inventions. It is easy 
enough and harmless enough for the believer in a certain form of 
social organization to sit down and ask himself : "What institutions 
and what methods will best serve that form of social organization 
in which I believe?" but we must not be disappointed if quite other 
institutions and methods are developed. 

Socialism is the child of capitalism. If the Socialist State is 
ever realized at all it will be a development of the capitalist State, 
not a new^ creation. Many of us believe that the transition from 
capitalism wall be a trancjuil process, stretching over a period of 
many years ; that the "Social Revolution" of which we hear so much, 
instead of being a terrible upheaval attended with an enormous 
amount of violence and suffering, which even the stoutest hearts 
must anticipate with anxiety, is a long-drawn process of social effort 
and experiment. The Social Revolution is not a sanguinary episode 
which must attend the birth of the new social order. It is a long 
period of effort, experiment and adjustment, and is now taking 
place. 

The acceptance of this evolutionary view will save us from 
w^asting time and energy in devising social institutions and methods 
to conform with abstract principles. Instead, we shall seek the 
beginnings of such institutions and methods as the new epoch will 
require within the present order, together with the beginning of the 
new epoch itself. 



K. CRITICISM OF SOCIALISM. 
337. The Transition to the Socialist State. 

BY O. D. SKELTON. 

The first problem that faces the socialist — how catch the hare — 
is primarily a question of tactics, but its solution largely determines 
the character and extent of the difficulties facing the collectivist 
commonwealth at the outset. Is the capitalist to be expropriated 
without indemnity, or to be offered compensation? The earlier hot- 
blooded demand for the expropriation of the robber rich without 



592 READINGS IN ECONOMIC PROBLEMS 

one jot of payment is now; heard more rarely in the socialist camp. 
This attitude was consistent with the catastrophic view of social 
evolution, the view that the revolution would be "an affair of twen- 
ty-four lively hours, with Individualism in full swing on Monday 
morning, a tidal wave of the insurgent proletariat on Monday after- 
noon, and Socialism) in complete working order on Tuesday." But 
in these post-Darwinian days this naive expectation is untenable. 
With the growing admission that the new order must be established 
by degrees, it is seen that it would be impossible to expropriate 
certain capitalists and leave the rest in undisturbed possession. 
Further, forcible expropriation without indemnity would be impos- 
sible ; even were the; great majority of the manufacturing proletariat 
won over to the polic}^, they could scarcely hope to overcome the 
determined resistance of the millions of farmers and the urban 
middle class. 

If the other horn of the dilemma is then unanimously chosen, 
and the capitalists bought out at one hundred cents on the dollar, 
how is the condition of the poorer classes one jot improved? There 
will be heaped up an immense debt, a perpetual mortgage on the 
collective industry ; rent and interest will still remain a first charge, 
still extract "surplus labor" from the workers. Even if collectivist 
management were to prove every whit as efficient as capitalistic, 
the surplus for division among the workers would not be increased 
beyond that available to-day. Indeed, it would be diminished. To- 
day a great part of the revenue drawn in the shape of rent and in- 
terest is at once recapitalized, and makes possible the maintenance 
and extension of industry. A socialist regime could not permit the 
paid-off capitalists to utilize their dividends in this manner, increas- 
ing their grip on industry; they would be compelled to spend it in 
an orgy of consumption. All provision for capital extension would 
therefore have to come out of what was left of the national divi- 
dend. The last state would be worse than the first. 

Recognizing this, various socialists have proposed, once the cap- 
ital has been appropriated, to put on the screws by imposing in- 
come, property, and inheritance taxes which will eventually wipe 
out all obligations against the state. In other words, they would 
imitate the humanitarian youngster who thoughtfully cuts off the 
cat's tail an inch at a time, to save it pain. Doubtless there are, 
within the existing order, great possibilities of extension of such 
taxes for the furtherance of social reform. Possibly our withers 
would be unwrung if the socialistic state confiscated the multimil- 
lionaire's top hundred million by a progressive tax. But the for- 
tunes of the multimillionaires, spectacular as they are and politically 



PROJECTS OF SOCIAL REFORM 



593 



dangerous as they are, form but a small proportion of the total 
wealth. So^ soon as the tax came tO' threaten the confiscation of 
the small income as well as the great, the matter would again be- 
come one of relative physical force. 

338. Socialism No Remedy for Inequality. 

BY N. G. PIEJRSO'N. 

Under State socialism, pure and simple, the Government of the 
country would assume the ownership of the instruments of pro- 
duction. We take it that this end might be achieved in the follow- 
ing manner. Just as at the present it already owns the postal sys- 
tem, just as in certain countries it already owns and works the 
railways, manufactures cigars and matches, so it might successively 
assumie the ownership, and undertake the working of all factories 
and workshops, all means of transport, farms, fisheries, warehouses, 
and shops. In order to be able to form by degrees a staff oi prop- 
erly qualified officials, the State would have to be careful not to 
proceed with undue haste. Beginning with those branches of indus- 
try, in which no great experience or intelligence was required, it 
would have to proceed step by step in extending the sphere of its 
operations, and would have to be content if, at the end of sixty or 
a hundred years, it had succeeded in bringing the whole of produc- 
tion within that sphere. From this, however, it follows that the 
transfer would necessarily have to^ be effected on terms of adequate 
compensation to the present owners. We are now leaving questions 
of equity entirely out of consideration, and regarding only the eco- 
nomic aspects of the question. During the time when the State was 
engaged in appropriating the instruments oi production, there 
should be no disturbances of a nature to occasion direct distress, 
and such disturbances would be inevitable where sentence of con- 
fiscation was hanging like a sword of Damocles over the head of 
every capitalist for a number oi years. The more it became evi- 
dent from experience that the danger was real and no mere bogey, 
the worse would things grow. People would become much less in- 
clined to save, and much more disposed to squander. The proper- 
ties which the State was to take over would ultimately have got into 
the most melancholy condition of decay, and habits of neglect and 
recklessness would have become general and would be slow to dis- 
appear. 

A State, which meant to become socialist, would have to dO' one 
of two things : if it offered no full compensation, it would have to 
take over the whole production in a very short period of time ; if. 



594 



READINGS IN ECONOMIC PROBLEMS 



on the other hand, it meant to take over the various branches of 
production by degrees, it would be unable to escape the necessity 
of offering compensation. The former alternative v\rould be impos- 
sible, even in such a small country as Holland. The second alterna- 
tive would, therefore, have to be chosen on purely economic grounds, 
apart from all considerations of justice. And the compensation 
would have to be such as would be deemed sufficient by the recip- 
ients themselves, otherwise it would fail in its object. It has been 
suggested that the compensation might be paid in thirty or fifty 
annuities. Certainly this system, like many another, could be ap- 
plied; but we must clearly understand that everything which re- 
duced the compensation would diminish the care given to such 
goods as the State had not yet appropriated. And it would be of 
the utmost importance that this care should not be relaxed, but 
should continue unabated up to the very end. 

It would of course be possible to create a certain inducement for 
the owner not to neglect his property, by providing that the number 
or the amount of the annual payments made by way of compensa- 
tion should depend upon the state of the property at the time of its 
transfer to the Government ; it is very much to be questioned, how- 
ever, whether this would prove a sufficient inducement. Every one 
would compare the actual advantage that accrued from saving the 
expense of upkeep with the possible disadvantages of the annual 
payment system, and it is easy to judge what the result of the com- 
parison would be in most cases ; more especially if the payments 
took a form which did not commend itself to the owner, or if there 
were any reason to suppose that the socialist State might not fulfill 
its obligations. 

We look further into the future; sixty, or, say, a hundred years 
have passed; what condition of things do we see now? What has 
changed and what has not? 

The principal survival is the inequality, the very thing that some 
people found most difficulty in submitting tO' in the past. There are 
no longer any merchants, shipowners, or manufacturers, there are 
no landowners or bankers; but, unless the annuity system of com- 
pensation has been adopted, we find, instead, a very large number 
of holders of Government stock, so that there are as many owners 
of property as before. This class will remain and increase. For 
the socialistic State will have recognised — if not at once, then after 
being taught by bitter experience — that with growth of population, 
capital also miust grow, and that it must grow even more rapidly 
than the population. The State will therefore have to encourage 
thrift by paying a certain rate of interest on all savings entrusted 



PROJECTS OP SOCIAL REPORM 595 

to its keeping. It will have to maintain the law of inheritance; for 
there can be no strong incentive to save, unless goods for consump- 
tion and claims in respect of debt can be handed down from one 
generation to another. We do not know if this is quite compatible 
with the socialistic system, but we do- know that it is absolutely 
necessary, since the need for capital will always remain, no matter 
on what lines society may be organized. 

The inequality thus remains; only certain of its causes disap- 
pear. Fortunes can no longer be accumulated in commerce or in- 
dustry, nor does increased demand for agricultural or building land 
tend any longer to enrich the few at the expense of the many. But 
gambling on the Stock Exchange will fiot have disappeared. Even 
though the compensation should have taken the form of terminable 
annuities, it would be many years before all the bonds establishing 
their holders' claims to such annuities had disappeared, and it is 
probable that in a socialistic State these bonds would be subject to 
considerable fluctuations in the market. Even if all the annuities in 
the country itself were to have expired, there would still, no doubt, 
be bonds of other countries to speculate in.' Besides, there will 
never be wanting things tO' serve as the subject of betting and gam- 
bling transactions. If any one expects that the socialistic State will 
be able to get rid of these causes of inequalit}', his optimism must 
be rather extravagant. 

339. The Incompatibility of Socialism and Democracy. 

BY A. SCHAFFI^e:. 

It is, to begin with, a delusion to imagine that collective produc- 
tion could be organized and administered at all in a republic which 
from base to summit of the social pyramid was reared on demo- 
cratic principles. It is no doubt a mistake to aver that collective 
production or even an entirely collective industrial system is alto- 
gether inconceivable, or must come to grief by reason of the over- 
whelming burden imposed on the central political power. I have 
myself shown that this is a mistaken view. But it is, on the other 
hand, quite certain that collective production, the universal panacea 
of the Social Democrats, would be wholly impossible unless the most 
carefully graduated authority were vested in the corporate govern- 
ing organs, authority which should extend from the lowest to the 
highest and most central parts of the productive system. It would 
be impossible to allow that either fronii without inwards or from 
within outwards there should be constant overturning, changing, 
and all the confusion of new experiments. But if this is not to be. 



596 READINGS IN ECONOMIC PROBLEMS 

then a stable and self-sufficient central authority and a similarly 
constituted administrative system throughout the state will be ab- 
solutely necessary. And these two essentials could only for all 
time stand securely when based on very broad foundation-stones 
of some powerfully moderating elements. But then where would 
be your democratic republic from top to bottom and from centre to 
circumference? Where would be your freedom and equality? 
Where your security against misuse of power and against exploita- 
tion? The fact is, collective production on a democratic basis is im- 
possible. On a basis of "authority" it is possible, and even in part 
actually existing, but as such it is non-democratic and has no charms 
for the proletariat. 

340. The Case against Socialism. 

BY WILUAM GRAHAM. 

To the general scheme of socialism it is easy to see many ob- 
jections. The first is that nothing could be produced either in the 
sphere of material or intellectual production that was not pleasing 
to the chiefs or the heads of the departments of production. At 
present it is demand which determines what shall be produced, and 
every conceivable demand is catered to. Under collectivism produc- 
tion will determine demand ; at least demand will have to accom- 
modate itself to production. The state would practically control the 
production of immaterial things. It could print or suppress what 
books it pleased, because it would control all the printing presses 
and pay all the printers. 

The next objection refers to the quantity and quality of the pro- 
duction. It is urged that the great stimulus to the private interests 
of the industrial chief being withdrawn, he will take little interest 
in the result. The workers will be disposed tO' take things easy, 
work in itself not being pleasant, and no one fearing dismissal 
under a socialist regime. Were the chiefs restricted to shares equal 
with the laborers, no economic incentive would be furnished them 
to make the output of their departments as much and a^ good as 
possible. In a word, impracticality may be written large over the 
collectivist scheme so far as it would largely cut down the salaries 
Oif superiors, discourage inventors, or arbitrarily dictate production. 

A common objection tO' socialism is that under it the supply 
of capital to create or to prevent the deterioration of instruments of 
production would be insufficient, from the withdrawal of the pres- 
ent potent stimulus to saving in the shape of interest. Under Col- 
lectivism the new capital would take the form of a tax or a deduc- 



PROJECTS OF SOCIAL REFORM 597 

tion from gross product. Abstinence, necessary to the accumulation 
of capital would not be paid for by the receipt of interest by the 
individual. There is reason for thinking that he therefore would 
refuse tO' sanction the tax which made his abstinence necessary. 

But the commonest of all the objections to socialism is that lib- 
erty would be in danger ; liberty, which, as Mill says, is next to food 
and drink, the mO'St craving want. It is objected that the vState 
being sole producer, the leaders and directors of industry might be 
despotic. The power of buying the things we pleased would be 
narrowed, and liberty of thought and speech there could not be if 
the State were the sole owner of the printing presses. 

Mill's main objection to socialism, however, is that under it 
there would be no asylum left for individuality of character. He 
fears that public opinion would be a tyrannical yoke; and doubts 
"whether the absolute dependence of each on all and surveillance 
of each by all would not grind all down intO' a tame uniformity of 
thoughts, feelings, and actions." We should thus, all, cast in mo- 
notonous moulds, become as like as sheep in a flock. The "general 
average" would become utterly weary, flat, and unprofitable. 

Doubts have been frequently expressed whether culture would 
not be in danger under Socialism, Would the mass of the people 
in a democratic society, appreciate a thing they had not got, and 
did not know? Would they recognize the necessity of setting aside 
funds for its support and encouragement? Sidgwick says, "It is 
only in a society of comparatively rich and leisured persons that 
these capacities for culture are likely to be developed and trans- 
mitted in any high degree." 

341. Two Disadvantages of Socialism. 

BY N. G. PIERSO'N. 

Here, then, we have the first of the disadvantages of socialism: 
there would be little progress ; and this disadvantage assumes a 
graver aspect when we consider two things. First, there would 
be no competition. There might be a certain emulation among the 
various directing officials to outshine one another, but this emula- 
tion would not make up for the absence of the powerful stimulus 
of competition. Secondly there would be no chance of ever placing 
at the head of an enterprise any person whoi acquired his training 
outside the circle of officials. Why is it that, in nominating direc- 
tors of joint-stock companies, care is generally taken not to select 
one of the staff of the office employees? The reason lies in the qual- 
ities of officials. The socialistic State, however, would have no al- 



598 READINGS IN ECONOMIC PROBLEMS 

ternative. There would no longer be any persons who had man- 
aged businesses of their own. The top could only be reached by 
ascending each of the rungs of the official ladder. When we take 
all this. into consideration, we think we are justified in expressing 
a fear that progress with regard to production is scarcely tO' be 
reconciled with socialism. 

In the second place, there is reason for fearing that far too little 
capital would be formed. The State might, of course, encourage 
the formation of capital by undertaking to accept the custody of 
people's savings, and to pay a certain interest thereon. But unless 
the State were to do more than this, it would not be doing anything 
like enough. The capital now in course of formation has its origin 
not only in savings effected out of normal incomes, but in the put- 
ting by of what is in excess of normal incomes. When rents rise, 
or large profits are made by able or fortunate entrepreneurs, let not 
our first and exclusive attention be directed to the economic inequal- 
ities produced in this manner. I<et us remember that these high 
rents and large profits will, for a large part, prove a gain to the 
whole community through being converted into instruments of pro- 
duction. This is a point that is frequently forgotten, and yet it 
merits all our attention. Struck by the large incomes of landlords, 
or manufacturers, people sometimes ask how any one can spend so 
much money in a year. Only a relatively small part of that income, 
however, is spent ; the bulk of it is saved, and presently assumes 
the form of railways and tramways, factories, ships, reclaimed 
land — in short, of all those useful things without which production 
on a large scale would be impossible in these days. When we want 
to calculate how much the masses would gain if all the economic 
inequalities could be done away with, we must beware of the error 
or adding together all incomes, and dividing the total by the total 
of separate individuals or households composing the population; 
what we should add together is the expenditures, and not the in- 
comes ; the difference between these two represents capital formed, 
which must suffice to meet the new demand for capital resulting 
from growth of population and other causes. If rent and entre- 
preneurs' surplus were to disappear owing to the State having become 
the sole landowner and the sole manufacturer, then a very potent 
cause of the formation of capital among the people would cease to 
operate. Government would have to leave a sufficiently wide margin 
between the prices which it asked and the wages which it paid. _ In 
fact it would have to neglect doing the very thing which socialists 
are constantly urging it to do, namely, to regulate prices in such a 
way that no article bought at the State stores should cost more than 
the average amount of labor involved in producing it. 



PROJECTS OF SOCIAL REFORM 599 

L. COLLECTIVISM VERSUS INDIVIDUALISM. 
342. The Freedom of the Individual. 

P>Y HERBERT SPENCER. 

Our political practice, and our political theory, alike utterly 
reject those regal prerogatives which once passed unquestioned. 
Though our forms of speech and our State-documents still assert 
the subjection of the citizens to the ruler, our actual beliefs and our 
daily proceedings implicitly assert the contrar}^ Nor has the rejec- 
tion of primitive political beliefs resulted only in transferring the 
authority of an autocrat to a representative body. 

How entirely we have established the personal liberties of the 
subject against the invasions of State-power, would be Cjuickly dem- 
onstrated, were it proposed by Act of Parliament foircibly to take 
possession of the nation, or of any class, and turn its services to 
public ends ; as the services of the people were turned by primitive 
rulers. And should any statesman suggest a redistribution of prop- 
erty such as was sometimes made in ancient democratic communi- 
ties, he would be met by a thousand-tongued denial of imperial 
power over individual possessions. Not only in our day have these 
fundamental claims of the citizen been thus made good against the 
State but sundry minor claims likewise. 

Ages ago, laws regulating dress and mode of living fell into 
disuse ; and any attempt to revive them would prove the current 
opinion to be, that such matters lie beyond the sphere of legal con- 
trol. For some centuries we have been asserting in practice, and 
have now established in theory, the right of every man to choose 
his own religious beliefs, instead of receiving such beliefs on State- 
authority. AVithin the last few generations we have inaugurated 
complete liberty of speech in spite of legislative attempts to sup- 
press or limit it. And still more recently we have claimed and 
finally obtained, under a few exceptional restrictions, freedom to 
trade with whomsoever we please. Thus our political beliefs are 
widely different from ancient ones, not only as to^ the proper depos- 
itory of power to be exercised over a nation, but also as to the extent 
of that power. 

Not even here has the change ended. Besides the average opin- 
ions which we have just described as current among ourselves, there 
exists a less widely-diffused opinion going still further in the same 
direction. There are to be found men who contend that the sphere 
of government should be narrowed even more than it is in England. 
They hold that the freedom of the individual, limited only by the 



6oo READINGS IN ECONOMIC PROBLEMS 

like freedom of other individuals, is sacred ; and that the legislature 
cannot equitably put further restrictions upon it, either by forbid- 
ding any actions which the law of equal freedom permits, or taking 
away any property save that required to pay the cost of enforcing 
this law itself. 

343. A Socialistic View of Competition. 

BY W. D. P. BLISS. 

Individuals producing and struggling each for self, tho^se who 
have inherited wealth or education, or aibility or advantage of rank 
and circumstance, have been able to gain the ownership of the most 
valuable lands and of machinery, and have left the rest of man- 
kind, deprived of land and machinery, to sustain existence only by 
working for the possessing classes. Individual competition of man- 
ufacturers and employers compels them to^ produce as cheaply as 
possible in order to be able to sell as cheaply as possible. If they do 
not they must go out of business ; for under free competition he 
who sells a given article the cheapest will get the trade. Therefore 
the manufacturer and producer, compelled tO' buy in the cheapest 
market, strive among other things to buy labour as cheaply as pos- 
sible. The labourer, meanwhile, having no good land and no ade- 
quate capital, is compelled to sell his labour force at the best price 
he can. But since men multiply rapidly while land and capital are 
limited, and since machinery and invention constantly enable fewer 
and fewer men to- do work formerly done by many, there soon 
comes to be competition of two men tO' get the same job. Now, the 
employer we have seen to be compelled to employ those who will 
work cheapest. There thus comes to be a competition between 
workmen to see who* will work cheapest and so get the job. This 
goes on developing till wages fall to just that which will support 
and renew the lowest form O'f life, that will turn out the requisite 
grade of work. It is true that tO' an extent it pays to employ the 
higher grades of labour, because they turn out more and better 
work which will command more money ; but this is more than coun- 
terbalanced, except in a small residium of industry, by machinery 
and invention, which more and more enable unskilled labour, or 
at least labour very slightly skilled, to take the place of skilled la- 
bour. Women, usually partly supported by fathers, husbands, broth- 
ers, and more and more by lovers, can afford to work cheaper than 
men. and hence supplant men; boys supplant women; girls, boys; ig- 
norant races those more educated ; — a process not theoretical, but 
which can be seen in the history of any factory town. The division 



PROJECTS OF SOCIAL REFORM 6oi 

of labour, miarvellously increasing the product, moire and more 
compels the worker tO' become a mere "hand," dependent on his 
machine, and knowing only one detail of one branch of one indus- 
try ; so that when invention changes that detail he is left an un- 
skilled worker. Competition, toos continually drives machinery at 
a faster and faster rate; so that while skilled American labourers, 
for example, get higher wages than those of any other country, 
they turn out a still greater relative product, and are sooner worn 
out and left to earn nothing. Organizations of labourers strive to 
prevent competition amongst themselves, and tO' unite against em- 
ployers, whO' in their turn are comipelled to unite, bringing on all 
the evils of strikes and a class war. Meanwhile, in spite of the 
trades unions, since they are able to organise only a comparatively 
few of the more skilled workmen, the competition of the unor- 
ganized either brings down wages or produces miseries which grow 
more rapidly than trades unionism can do good, causing industrial 
depression in spite of trades unionism. On the part of employers, 
too, combinations beget larger combinations. Leading firms unite. 
Monopoly sets in. Employers see that to combine is better than to 
compete. Railways, gas companies, various industries develop gi- 
gantic monopolies. Wealth is concentrated in the hands of the 
few. This means a decreased demand for ordinary products ; since 
the masses, though needy, have no money with which to buy. De- 
mand is reduced, even while the people are starving. Crises grow 
more and more frequent. Great wealth and great possibilities of 
gain for the few develop a love for speculation and luxury. The 
wealthy are educated and cultured; they have time for art and reli- 
gion. They are often charitable and generous. The workers, mean- 
while, compelled to work and strain harder and harder under the 
competition to- live, grow materialistic and reckless. The rich come 
to appear to- deserve their wealth. But inherited wealth develops 
fast living ; and inherited poverty, hopelessness, recklessness, and 
thriftlessness. In a work, we have the modern world. This, say 
Socialists, is what has happened and must happen as long as indus- 
trial competition reigns. 

344. What Socialized Efficiency Costs Germany. 

BY SAMUKT-. P. ORTIT. 

Is Germany a model for our democracy? What price is she 
paying for her well advertised efficiency? How is her paternalism 
afir'ecting human nature? 

The lure is a socialized Germany. The State owns railroads, 



6o2 READINGS IN ECONOMIC PROBLEMS 

canals, river transportation, harlDors, telegraphs, and telephones. 
Banks, insurance, pawnshops, are conducted by the State. ]\Iunici- 
palities are landlords of vast estates ; they are capitalists owning 
street car lines, gas plants, electric light plants, theatres, markets, 
warehouses. The cities conduct hospitals for the sick, shelters for 
the homeless, soup-houses for the hungry, asylums for the weak and 
unfortunate, nurseries for the babies, homes for the aged, and cem- 
eteries for the dead. 

Add to this the vast and complex system of State education, a 
system of training that aims at livelihood. Nothing like the per- 
fection, the drill, and the earnest, unsmiling efficiency of these ele- 
mentary and trade schools exists anywhere else in the world. In 
1907, there were 9,000,000 children in the elementary schools, taught 
by 150,000 teachers, nearly all masters, as the "school ma'am'' does 
not flourish in the Kaisers realm. Every one of these pupils is 
headed for a bread-and-butter niche in this land of super-orderli- 
ness. And more than 300,000 persons are employed by the State 
in some form of educational work, training the youth into adept- 
ness, in all sorts of schools. 

The army, as well as the school, brings home to every German 
family the fact that the State is watchful— and jealous. It demands 
that two full years of every young man be "socialized" ; and the 
peasant woman and the artisan's wife must contribute her toil to 
the toll that the vast system of State discipline demands. 

Even the Church, that form of organized social effort which is 
everywhere first to break away fromi the regimen of the State, re- 
mains "established." So I might continue through almost every 
activity — ^the vast system of State railroads, mines, shipyards — and 
include even art and music. 

This socialized Germany is alsO' an industrialized Germany. 
Everyone knows how cleverly advertised are German goods. But it 
is always well to remember that this race of traders and manufac- 
turers has somehow, in one generation, come from a race of solid 
scholars, patient artisans, and frugal peasants. The old Germany 
has disappeared ; the Germany of the spectacles, the shabby coat, 
and the book; the Germany of Heidelberg and Weimar. A new 
order has taken its place. As you ride in the great express, from 
Cologne to Berlin, you never are out of sight of clusters of tall, 
smoking chimneys. Symbolic of the new Germany are the Deutsche 
Bank, the trade of Hamburg, and the steel works of Essen. 

Now, how has it been possible to make this transformation? To 
create out of a slow, plodding, peasant-artisan people an industrial- 
ized population, out of a race of scholars a race of manufacturers; 



PROJECTS OF SOCIAL REFORM 603 

to fill a land no larger than one half of Texas with 65,000,000 peo- 
ple who are breeding at the rate of nearly a million a year, and to 
engage the State in doing all sorts of things for these thriving fam- 
ilies? It is the political miracle of the century, and its socialized 
efficiency is the talk of the hour. How^ has it been accomplished? 

The Kaiser has adapted, line for line and point for point, the 
pattern of medieval feudalism to the exigencies of modern indus- 
trialism. So, to begin with, the Kaiser has an obedient people, in 
whom the feudal notion of caste is second nature. Every one has 
his place, and shall keep it. Such shifting as now is tolerated is 
due to wealth and tO' the kind of ambition which luxury always 
awakens. 

You cannot have superimposed classes without obedience. The 
average German is docile, and wants to be told what to do. 

The Government has its eager hands in every pocket, its anxious 
fingers on every pulse. From the cradle tO' the grave, the State 
watches the individual, commands him and, in a way, cares for him ; 
always seeing to it that he has a place in the national economv and 
that he keeps it. 

Intent on getting more tangible evidence, I visited the office of 
the Municipal Charities, where I was shown long columns of figures 
that indicated a heavy and rapid increase in poverty. I was told 
that this was due largely to the migration of rural lalborers tO' the 
city, where they soon find themiselves out of work and in need of 
public aid. I was also- told that the city helps to support many old • 
people who also receive old age pensions, the amount of this pen- 
sion being miserably small. 

To an outsider, of course, the inner workings of the mind and 
heart are hidden. But the outer aspect of the German State is per- 
fectly patent. It is mechanism^ — there can be no doubt about it — 
the mechanism of the solar system. It is a land where every mem- 
ber of Society has an ordained orbit and moves in it around the 
central sun, the State, which radiates a mystic gravitation into every 
activity — almost every thought — of every man, woman, and child. 

Here you see the most varied activities held to the ideals of 
efficiency through a perfected feudalism^ So that all Carl and John 
need to do is to obey ; then they are taught the rudiments of learn- 
ing and a trade, are insured ag'ainst the most disturbing episodes 
of life, assured also' of some leisure, considerable amusement, and 
a decent burial. And that is life ! 

Of all invented contrivances this German machine is the most 
amazing, this vast enginery of State with the patents of Hohenzol- 
lern, Bismarck, & Co. on every part, that has reduced the life of a 



6o4 READINGS IN ECONOMIC PROBLEMS 

great people tO' complacent routine and merged the rough eccentrici- 
ties of all into a uniformity of effort and ambition. 

It is true that John and Carl can live their ordered lives in rou- 
tine and contentment, rounding out year after year of plodding toil, 
paying their dues to the various funds and their taxes to the Gov- 
ernment, rearing their families, and entrusting them to the same 
over-care. But what sort of creatures does it make of John and 
Carl, and of their children and their childrens' children ? 

There is no exact way, not even a German way, of measuring 
originality, individual initiative, and independence. But this also 
is certain: patience, obedience, minute training, do not foster dar- 
ing and versatility. John and Carl settle down, literally settle down, 
to an uneventful life, looking forward to no change, taking no risks, 
seeking no alternatives. Once a butcher, always a butcher. This 
makes Germany depressing to a restless American who is always 
willing to "go it alone" and to get "a run for his money." 

Some years ago, Mr. Ludwig Max Goldberger gave his country- 
men the cheering news that Americans need not be feared, because 
"all that they have done, we can imitate." This is an actual policy. 
I have been told by American manufacturers that they have found 
their machines so exactly copied in German shops that only the ab- 
sence of the patent dates and of the name of the makers told them 
that the machines were not made in the American shop. Already 
this land of drill and obedience is becoming an empire of conscious 
imitators. 

There are on the German horizon ominous portents. First I 
should place the moral and psychological effects of luxury. Few 
nations can stand the sapping suction of plenty. The effect of the 
profligacy that is everywhere apparent in the New Germany will be 
particularly swift and fatal in a people who for generations have 
been frugal and plain. 

On top of this wealth is an imperial debt that has risen from 
$490,000,000 in 1901 to $1,345,000,000 in 1912 ; this without reckon- 
ing the provincial and municipal debt which is four times larger 
than the imperial. The burden of taxation in 1912 was $70 per 
average family. 

And on top of this burden of debt sits the militarist, taking, in 
1911-12, 622,520 young men out of the fields and factories for the 
standing army. This year 130,000 more are to be called out; and a 
new and unheard-of war program is proposed to this patient and 
obedient people. One must admire alike the audacity of the pro- 
posal, the patriotism of the voter, and the magnificent discipline that 
has wrought such submissiveness. 



PROJECTS OF SOCIAL REFORM 605 

The red omen is the most conspicuous. Socialism is skillfully 
combining the revolt against this imperial, personal Government, 
and the desire of the workman for a greater share of the wealth of 
the land. 

Then what will happen to this centralized bureaucracy; and 
what will become of the system oi State aid and municipal social- 
ism? For without an efficient bureaucracy you cannot have an ef- 
fective paternalism ; and without centralized administration you can- 
not run railroads, theatres, and pawnshops. 

It is the one point usually overlooked by the enthusiasts. They 
paint glowing pictures of socialized Germany, but they fail to look 
under the surface. Germany's system is built upon discipline ; hard, 
military, iron discipline, that grips every baby in its vise and forces 
every man into his place; a benevolent tyranny, no doubt, but nev- 
ertheless a tyranny ; an efficient feudalism, but none the less a feud- 
alism of self-coiiscious caste and fixed tradition. 

No doubt the time has come when we must modify our system 
of extreme individualism by some system of social cooperation. 
How far shall we proceed in this path of socialized efficiency? Are 
we willing to pay the German price? Could wc do it even if we 
wished to? Only a few peoples are fitted for such rigor. I believe 
that America _would be a poor place for a Hohenzollern efficiency 
test. The carefully trained American barber would quite suddenly 
take it into his head to be a sailor or a constable, and "all the king's 
• horses and all the king's men" couldn't hold him to his economic 
predestination. 

When all has been said, I cannot escape the conviction that the 
real significance even of Germany is not in what the State has done 
for the workman but what the German workman has succeeded in 
doing for himself, in spite of the State. 

This brings us back to the first postulate of Anglo-Saxon indi- 
vidualism : the basis of social cooperation is self-help. 



M. THE FUTURE OF INDUSTRIAL SOCIETY. 
345. An Ethical Aspect of the New Industrialism. 

BY AI.VIN S. JOHNSO'N. 

The aristocracies have vanished, we shall never know them 
again. The work of supplying the world, now and for the future, 
has become one of such complexity, requiring so broad a diffusion 
of general intelligence, that merely personal dignitaries can never 



6o5 READINGS IN ECONOMIC PROBLEMS 

again acquire their ancient influence over man's mind, their ancient 
hold on his conduct. There remains in the world only the common 
man. Differences in natural endowment, in culture and in wealth 
persist ; but these can not alter the fact of a fundamental democracy. 
So far as we serve, we serve the common man. 

But — and this we must fix in our minds — the common man of 
today is not the obscure citizen of earlier epochs. The same com- 
mercial process which has broken down the earlier class organiza- 
tion has produced a differentiation in economic structure, an interde- 
pendence of parts, which compels us to conceive of economic' society 
as a living organism. The common man of today compares with 
his prototype of yesterday as the cell in an organized tissue com- 
pares with the cell in the half-coherent mass of protoplasm. The 
functions of the individual are now organic functions, far trans- 
cending the narrow confines of his own personality. The pilot, the 
engineer, the steel worker, the coal-hewer, are significant, not in 
themselves, but in the social work they perform. With the progress 
of time, a constantly increasing share of the population assumes 
functions essentially social. 

In serving the common man, then, we are performing a work 
far more worth while than that of supplying the needs of an indi- 
vidual, of whatever personal worth. We are serving a social func- 
tionary in the last analysis, society itself. Our work, then, is sig- 
nificant or meaningless according as we conceive society itself as 
worthy or not. If we are constrained to think of our society as ninety- 
million persons, chiefly knaves and fools, the service will be irksome, 
to be shirked, if possible. If the society we serve is full of brutality 
and injustice, disfigured with poverty and ignorance, corrupted with 
cynicism and self-indulgence, it can not inspire us with loyalty in 
its service. The exhausting toil of the long day, the hopeless mis- 
ery of the sweatshop, the sordid depravity of he slum, can not much 
longer cumber the earth if society is to command the best efforts 
of its servitors. We are not now concerned with the question of 
justice to those who live and toil in wretchedness. That question 
is worth considering in its proper place ; it is sufficient here to indi- 
cate that, for the orderly progress of industry in the coming era, we 
must remove conditions that destroy our faith in society. Men in 
the service of society will give their best efforts only if society is 
worth serving. 

But it is not sufficient that society should be worth serving, the 
worth of society and the worth of work in its service must be given 
concrete expression if these values are to mold men's conduct. To- 
day these values are perceived, but dimly ; they exercise an influence 



PROJBCTS OP SOCIAL REFORM 607 

in limited fields. Men in the service of the railways, as a rule, en- 
deavor honestly to realize the ideal of continuous and adequate ser- 
vice. Coal miners are loth to strike at the opening of winter. Their 
social function plays, a part — though unfortunately a minor part — 
in controlling their economic policy. As a rule, however, the ser- 
vants of society, employers and employees alike regard any peculiar 
dependence of society upon their services as an element strengthen- 
ing their bargaining position, a peculiar opportunity for gain. The 
wheat is falling from the head; the fruit is rotting on the tree; an 
excellent time for a concerted demand for higher wages ! An in- 
dustrial city has been built upon the expectation of the continuous 
supply of material : what an opportunity for the material producers 
to levy tribute! A whole nation lives from day to day upon the 
fruits of its mechanical industries ; coal is its bread. A dazzling 
prospect of gain lies before those who' can possess themselves of 
the mastery of the mines. Responsibility of function is opportunity 
for gain ; so prevalent is this conception that when we assert that 
the use of responsibility for gain, not for service, is a species of 
treason, we seem to be harking back to the middle ages. And so 
we are. But there is much in the mediaeval industrial spirit that is 
eternal : much that must be restored to our society after the dis- 
orders of an era of expansion and exploitation. 

The worth of society and of work in its service — these are 
the social values that must govern in the new industrialism. As 
mere abstract ideas they can have no potency. As abstract ideas 
the kings and nobles of an earlier age had no potency ; they were 
invested with the power of social values by the work of architects 
and sculptors, poets and philosophers. The poets, as it were, cre- 
ated kings and knights — ideals toward which actual rulers and no- 
bles sought to elevate themselves. Architects and sculptors, paint- 
ers and poets, can transform social man and society intO' values 
capable of dominating industry. The task may be difficult ; but it 
is no more difficult than that of vesting glory in the House of 
Atreus or the House of Bourbon. 

The ultimate need of the new industrialism, then, is not more 
trained skill, more applied science — although these two are good 
things in their way — ^but artists and poets who shall translate so- 
ciety and social man into terms of values worth serving. When 
these have done their work we shall hear less of the deterioration of 
labor and the abuse of responsibility, of industrial decay and social 
corruption, of irreconcilable conflict and threatened revolution. A 
revolution will have been accomplished : a revolution in ideals and 
in values. 



